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Banks, SMEs and accountants:
an international study of SMEs’ banking relationships
Professor Aidan Berry
Head of School, Brighton Business School
Certified Accountants Educational Trust, London, 2006
The Council of the Association of Chartered Certified Accountants consider this study to be a worthwhile contribution
to discussion but do not necessarily share the views expressed, which are those of the authors alone. No responsibility
for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be
accepted by the author or publisher. Published by Certified Accountants Educational Trust for the Association of
Chartered Certified Accountants, 29 Lincoln’s Inn Fields, London WC2A 3EE.
ACKNOWLEDGEMENTS
This report could not have been completed without the valuable support and advice from: Manuel Hernando and
Francisco Suarez of Registro de Economistas Auditores in Spain; Stephan Kleinmann of Mazars in Germany; Harold
Monk of Davis, Monk & Company in the USA; the staff of ACCA’s offices in Hong Kong; and ACCA’s Small Business
Unit – Professor Robin Jarvis, Rosana Mirkovic, and James Meyrick.
© The Association of Chartered Certified Accountants, 2006
PAGE 3
Contents
Executive summary 5
1. Introduction 11
2. Banking structure and characteristics 13
3. The accounting profession and its role 21
4. Research method 25
5. Banking relationships 35
6. Challenges faced by SMEs 51
7. Advice and the role of external accountants 57
8. Conclusions and areas for further research 65
References 71
PAGE 5
Executive summary
The issue of small business finance, the relationship between SMEs and their bankers and the role of accountants as advisers of SMEs have been subjects of considerable research over a long period in the UK and in other countries. Most of the evidence from that work establishes the importance of the banking relationship and the accountants’ role in providing advice to SMEs. The research evidence does, however, show variations in the levels of SME satisfaction with their banking relationships. This, together with evidence from other countries with different banking structures, has led to suggestions that banking structures may be an important determinant of SMEs’ levels of satisfaction with their banks.
Although research studies from different countries exist, each study differs in terms of aims, the questions asked and the method of data collection. To date no research has been carried out that uses the same research instrument to collect data from SMEs in different countries. This research addresses that gap in the literature and provides data that are comparable from country to country.
As well as providing comparable data the research also highlighted country-specific factors that needed further investigation. This was undertaken during the second phase of this research through a series of focus groups and interviews. Some of the findings warrant additional work.
The analysis provides some interesting and important insights into SMEs’ relationships with their banks and the effects of differing banking regimes and industry structures. It identifies some potential gaps in the provision of small business finance and advice and provides more understanding of the role of accountants as a source of financial and general business advice. The cross-country comparison provides insights into the effects of structural differences in the accounting profession and an indication of the potential impact of the separation of the audit, tax, preparation of accounts and advice functions on the future relationships between SMEs and their accountants.
EMPIRICAL EVIDENCE
Quantitative
1. Telephone interviews among SMEs.
1,004 SMEs were interviewed.
All sizes of SMEs were represented in each
country.
A wide range of industry sectors were
covered.
The continents represented were Europe,
America and Asia.
Countries covered were Germany, Hong Kong,
Spain, United Kingdom, United States of
America.
2. An online survey among ACCA members in the
UK elicited 377 responses.
3. An online survey among ACCA members in Hong
Kong elicited 127 responses.
Qualitative
There were face-to-face interviews with:
six practising accountants in the US.
a focus group with five practising accountants in
Spain.
a focus group with six practising accountants in
Germany.
Research conducted Winter 2005 to Summer
2006.
PAGE 6
Executive summary (continued)
SMEs AND THEIR BANKING RELATIONSHIPS
Relationships
• There is a wide variation in the number of banking
relationships SMEs sustain, from an average of 1.4
relationships in the UK to around 4 relationships in
Spain.
• The variation in the number of relationships is primarily
related to the country in which the SME resides.
• The structure of the banking industry in a country is
a significant determinant of the number of
relationships an SME has.
• Consolidation of banks may lead to an increase in
the number of relationships SMEs have, as
accountants advise them to spread their banking
risk.
Services used
• The banking services and methods of finance used
by SMEs vary with size but the primary determinant
of the variation is the country of residence.
• SMEs tend to have more banking relationships
where a combination of different types of bank
provide different services and compete for SME
business.
• Cultural norms and attitudes within countries may
have an effect on SMEs’ choice of financial service.
Raising finance
• SMEs wishing to raise finance are generally able to
do so in full or in part.
• Banks are either the sole source or one of several
sources of finance for SMEs in all countries studied.
• Accountants from all countries identify a lack of
collateral or security as a frequent reason for refusals
to provide finance.
• Although for German SMEs lack of collateral is an
important factor, the primary reason for refusal of
finance is lack of equity resulting from the impact of
tax laws on German SMEs.
• In the UK banks are used less as the main source of
finance than in the other countries surveyed.
COMMUNICATION AND SATISFACTION WITH
BANKS
Communication
• For smaller SMEs, visiting the bank is very
important, with nearly 75% of the smallest SMEs
visiting their bank.
• The larger SMEs tend to use more remote
communication methods, such as telephones,
writing and electronic communication, with 86% of
the large SMEs using electronic communication.
Satisfaction
• In general SMEs are satisfied or very satisfied with
the services they get from their banks.
• SMEs in the £50,000 to £1million turnover range
are generally less satisfied with their banks than
SMEs outside this turnover range.
• SMEs are less satisfied with their banks’ charges
and tariffs.
• SMEs are also less satisfied with their banks’ level of
understanding of their business.
• Accountants are also critical of the level of charges
and bankers’ level of understanding of their clients’
businesses, although the extent of the criticism
varies from country to country.
PAGE 7
Executive summary (continued)
• The ‘centralisation’ of decision making in banks as a
result of consolidation of the industry appears to
lengthen the decision-making process and to
decrease the level of communication between the
decision maker and the SME, leading to reduced
levels of understanding of the business and the
environment in which it operates.
• Country variations on satisfaction are present in the
data but these are likely to reflect cultural factors
rather than being related to the banking structures in
each country.
Benefits and propensity to change
• The benefits received by SMEs in the form of free
transactions and interest on current accounts vary
according to size, with the smallest businesses most
likely to get no benefits.
• The benefits are, however, more affected by the
country in which the SME resides; SMEs in Spain
and Hong Kong are least likely to receive ‘no
benefits’ and those in the UK are most likely to
receive ‘no benefits’.
• SMEs in continental Europe are much more willing
to change bankers than their counterparts in Hong
Kong, the UK and the US.
CHALLENGES FACED BY SMES
General issues
• Obtaining new business and general finance-related
issues are the biggest challenges facing SMEs.
• Future planning is high on the list of challenges
facing SMEs.
• Public sector bodies are identified by accountants in
a number of countries as prime examples of slow
payers.
Country-specific issues
• In the US, recruiting and retaining employees is
identified as an issue by SMEs and this is confirmed
by the accountants interviewed.
• The cost of employees is an issue for Germany, with
the accountants’ focus group suggesting that with
new EU employment legislation this will become
more important.
• SMEs in Spain identify competition as an issue. The
focus group suggested that this is due to competition
from low-wage economies such as the accession
states, now that Spain is no longer a low-wage
economy.
• German SMEs identified slow payment as an
important issue whereas although this is an issue in
Spain the use of factoring by SMEs offsets its
effects.
• Red tape and regulation is more of an issue in the
UK and Germany than in any of the other countries
surveyed.
ADVICE, ADVISERS AND THE ROLE OF THE
ACCOUNTANT
Sources of advice
• Accountants, lawyers and banks are the most
frequently used sources of advice.
• SMEs’ use of advisers is correlated to the size of
their business, with 75% of the largest SMEs
seeking advice compared with 43% of the smallest.
• Country variations exist in the ordering of
accountants and lawyers, some of which are role
related, eg the split between tax advisers and
accountants in Germany and the role of lawyers in
Spain.
PAGE 8
• Country-related differences are also apparent in the
use of business colleagues. From the explanations
provided by the SMEs’ accountants, this is related to
issues of attitude and trust.
• Government and public agencies are ranked lowest
as a source of advice; explanations for this included
lack of expertise, trust and commitment.
Role of accountants
• Accountants are the most frequently used source of
advice across the whole sample.
• They are used most for tax, audit and accounts
preparation work.
• Fewer than 40% of SMEs claim to use their
accountants for business planning, general advice or
as management consultants.
• Similarly, fewer than 40% claim to use their
accountants for advice on finance.
• The accountants’ results on these areas differ –
discussions suggest that advice is often sought in a
less formal way and sometimes after the first
approach to a financier.
• The use of accountants for advice on finance varies
from country to country, with Spanish SMEs using
their accountants almost twice as much as their UK
counterparts.
Influencing factors
• The effects of variations in regulations covering
SMEs’ financial reporting make inter-country
comparisons difficult without further in-depth
research.
• The acceptance by bankers in the US of annual
accounts prepared for tax purposes, using tax-
related rules rather than generally accepted
accounting practice, appears to be a sensible way of
reducing burdens on SMEs.
• The separation of accountants’ roles to comply with
professional guidelines on auditor independence may
inhibit the use of accountants for both finance and
business-related advice.
CONCLUSIONS
The findings from the study show that SMEs’ levels of
satisfaction with their banking arrangements are
generally very high, although there are areas where this
could be improved. The inter-country comparison
shows that there are vastly different ‘norms’ for the
number of banking relationships an SME might have.
Nonetheless, there does not appear to be a significant
negative or positive correlation between the number of
banking relationships and levels of satisfaction.
Although the size of the SME and the complexity of its
financing needs may be a contributory factor in
determining the number of relationships an SME has,
the primary factor is the country in which it operates.
This may be because the number of such relationships
may depend in part on the different historical structures
of the banking industry in different countries. For
example in the US, Germany and Spain there are more
banks operating than in the other countries studied,
and there is a longer tradition of small localised and
specialised banks. This affects the number of providers
a business may have to use to meet its financing
needs. The existence of a localised banking structure
may also affect the expectations of bankers and their
knowledge, not only of the business but also of the
environment in which it operates.
Executive summary (continued)
PAGE 9
The indications are that consolidation in the banking
industry in Germany, Spain and the US is providing
new and unexpected challenges for SMEs as the
potential for a bank’s policies to change after
consolidation may leave them without a source of
finance. This in turn is encouraging accountants to
advise clients to have multiple banking relationships to
reduce the risk arising from changes in banks’ policies.
It is also clear that differences in size and function of
banks in different countries, as well as increased
competition, lead to differences in the number of
banking relationships that SMEs have. The overall
conclusion to be drawn here is that there is no one
right way of setting up a banking structure to support
SMEs. Indeed, it would appear that the different
systems have worked in the past but that some of the
changes that are currently occurring, perhaps
influenced by global competition or by regulatory
changes such as Basel II, are having unintended
consequences some of which are detrimental to SMEs’
established banking relationships.
There appears to be a gap in the provision of finance
for SMEs with an annual turnover of up to £1 million,
which leads to lower satisfaction ratings by this group
of SMEs. The reasons for this are not immediately
apparent although respondents have suggested that the
cost of providing a fuller service is such that banks are
reluctant to do so. On the other hand, if the services
demanded were only those based upon the services
these SMEs currently use, meeting their needs would
not be a problem nor would there be a lower
satisfaction rating. It would appear, therefore, that the
supply does not match the demand or expectations of
this group of SMEs. It is possible that the explanation
here may lie in the fact that, because of their reliance
on collateral, their aspirational needs are not being met
and this, as suggested by some accountants
interviewed, is acting as a barrier to further growth
among SMEs within this size range.
The main issues faced by SMEs tend to be business
issues such as competition and getting new business.
These are difficult issues for SMEs to address and they
are likely to get worse as a result of the impact of the
accession states coming into the EU and increasing
competition from China and India. Some issues were
very country-specific, eg the problems of recruiting and
retaining employees in the US and the cost of
employees in Germany, but when considered together
with the effects of competition these may also provide
some indications for the future of SMEs in other
advanced countries, especially those within the EU.
Although there is considerable evidence from other
research that accountants, lawyers and bankers are the
most frequently used source of advice and this is
confirmed by this survey, there are factors identified
within this research which may warrant further
consideration. In the case of accountants, the changing
structure of the profession and the impact of regulation
and self-regulation to protect audit independence,
although unlikely to affect tax- and accounting-related
advice, may lead to problems for SMEs in accessing
appropriate advice on financial and business matters.
Similarly the shifts within the banking industry away
from localised banking services are having an impact
upon the SME sector and are likely to have an even
greater effect in future.
Executive summary (continued)
PAGE 10
RECOMMENDATIONS
The banking industry
Although in general the banking industry is providing a
service that satisfies its SME customers, there are areas
that warrant further consideration and research:
• the possible gap between the aspirations of SMEs
with turnover up to £1 million and the services
provided
• the level of satisfaction with charges, tariffs and
benefits and the impact of this upon banking
relationships
• the effects of moving from localised decision making
to more centralised decision making in terms of
banks’ understanding of an SME’s business and the
business environment in which it operates, and the
apparent remoteness of the decision makers from
the SME.
The accounting profession
The survey results show very high levels of SME
satisfaction with their accountants, but they also
highlight some areas for concern:
• the relatively low use of accountants for advice on
matters relating to finances, which, with an ever-
increasing range of financial products becoming
available, must raise the question of the sources of
advice that SMEs are currently using and the
adequacy and appropriateness of that advice
• the effects of regulatory and self-regulatory regimes
relating to audit independence on access to
accountants as a source of advice
• the question of whether accountants should be
taking a proactive rather than reactive role in
assisting their SME clients with finance-related
advice
• the extent to which accountants can play a positive
role in identifying simpler structures for accounting
to meet the needs of the various users, eg to what
extent the needs of the owner, the tax authorities
and financiers can be met by one single form of
reporting.
Policy makers and government
The findings show that the effects of regulation and red
tape are not universal problems and lessons can
therefore be learned from other countries. Some other
issues thrown up by this work that may be worthy of
consideration include:
• whether there are lessons to be learned from the
issues of the cost of employment and the difficulties
in recruitment being faced by SMEs in Germany and
the US
• how to improve the take-up of government sources
of advice to SMEs
• how to encourage smaller SMEs to access the
advice that is clearly available to them
• whether to encourage more use of business
colleagues as a source of advice, as occurs in
Germany and the US, and how to achieve the
change.
Executive summary (continued)
PAGE 11
Small businesses have been seen as an important
source of employment and growth in the economy. It is
widely appreciated that banks are the main, if not the
sole, source of finance for these small businesses
(SMEs). The importance of the accounting profession
as advisers to SMEs is also widely recognised. Most
research to date on banking relationships with SMEs
and SME relationships with accountants has been one
sided and country specific. Where comparisons have
been drawn between countries this has tended to be
based on different data sets from each country. The
present work aims to provide a basis for inter-country
comparisons by collecting a common data set from
each of the five countries included in the survey. These
countries are Germany, Spain, Hong Kong, the UK and
the US. They include three countries where an Anglo-
centric approach is dominant, namely the UK and the
US and to a lesser extent Hong Kong, which is clearly
heavily influenced by its past. By contrast, Germany is
a European country where the banking structure and
the structure of the accounting profession differ
markedly from those in the UK, hence Germany is often
held up as an example of how SME banking can be
done differently. Lastly, Spain has been one of the
‘tiger’ economies of Europe and has a highly
competitive industrial sector as well as a banking
structure with a greater number of banks than is the
case in the UK. Many of these banks are regionally
based and provide limited or specialist services that
affect the SME–banking relationship.
1.1 EARLIER RESEARCH
The issue of small business finance has been a topic of
discussion and debate for many years. Taking the UK
as an example1 we find that there have been numerous
government commissions addressing the topic (Bolton
1971; Macmillan 1931; Radcliffe 1959; Wilson
1979). This has been matched by considerable
research effort over the years. Studies concerned
specifically with banks as a source of small business
finance include the Warwick study (Fraser 2004) but
can be traced back over a number of years (see, for
example, Berry et al. 1993; Binks et al. 1992a; Binks
and Ennew 1996: Cosh et al. 1996; Cruickshank
2000; ESRC Centre for Business Research Cambridge
2000; Keasey and Watson 1994). A further strand of
publications is concerned with the relationship between
banks and SMEs. Here the work carried out for the
Forum of Private Business (Binks 1991; Binks et al.
1992b; Binks and Ennew 1997; and the Forum of
Private Business 2004) consistently identifies SMEs’
relatively low levels of satisfaction with their banking
relationships. A counter view is provided by the results
of the Institute of Directors’ survey (2000) that showed
only 9% of respondents had a ‘bad’ relationship with
their bank, 25% had an ‘acceptable’ relationship and
the remainder were satisfied. Similarly, the Federation
of Small Businesses’ report (2000) found 72% of
respondents were neutral, satisfied or very satisfied
with their bank relationship. The Bank of England’s
survey (2004) suggested that there were improvements
in the relationships as a result of an improvement in
the banks’ understanding of SMEs, and better
communication. The latest survey by the Federation of
Small Businesses (2006), however, suggests a lowering
in SMEs’ satisfaction with banks as a source of advice.
To date, the research and other work published in the
area of banking and SMEs tends not to attempt to
make any comparisons between countries. Where this
is done, the comparisons tend to rely on different data
sources. This report addresses that gap in the literature
by reporting on data collected through the use of the
same research instrument in five different countries. It
provides an analysis that enables the survey results to
be viewed in a comparative context.
1. Introduction
1 It is possible to trace a similar pattern of literature in the United States of America, and later in this report we refer to work by the US Small Business Administration. Similarly, it is possible to find some work on this topic relating to Germany, eg A. Mullineux (1994).
PAGE 12
In addition to providing a comparative analysis of the
five countries the report also draws upon independent
and parallel research with accountants and upon
confirmatory and explanatory research carried out with
accountants dealing with SMEs in each of the five
countries.
1.2 THE CURRENT PROJECT
For this work the data was collected from SMEs, and
from accountants dealing with SMEs, in each of the five
countries. This data provide different perspectives on
SMEs’ banking relationships, their relationships with
accountants as advisers, and on the accountants’ views
of banks as providers of finance and banking services
to SMEs. The data were collected by using the same
research questions for SMEs in each of the five
countries and by asking similar questions of the
accountants.
Aims and objectives
This study is intended to shed light on the gap in the
literature by providing comparative rather than country-
specific information. In particular, the aim is to provide
an inter-country comparison of SMEs’ relationships
with their banks and advisers and an insight into the
issues faced by SMEs in five different countries. The
study draws upon the views of SMEs in each of the
countries and upon the views of accountants working
with SMEs in each of those countries. The report
contrasts the views of SMEs and accountants,
highlights country- and size-based differences and
relates these to the banking structural arrangement and
cultural contexts of each of the countries.
In order to be able to compare results from the different
countries it is important to understand that the banking
structures differ in each of the countries and that these
differences may affect the results and the interpretation
of those results. For this reason, Chapter 2 describes
the banking structure in each of the countries surveyed.
Chapter 3 discusses the accounting profession and the
regulatory regime in each of the countries concerned.
This provides the background and context for the
interpretation of the results relating to SMEs’
relationships with their accountants and the
accountants’ relationships with SMEs’ banks.
Chapter 4 is concerned with providing the reader with
an overview of the research methods used. The
respondents and their characteristics are explored and
information is provided to enable the reader to
understand the structure of the samples, including the
industry base, the markets in which the SMEs operate
and the size characteristics of the SMEs surveyed and
of the accountants’ client bases.
The main body of the report is divided into three
chapters. The first of these, Chapter 5, deals with
banking relationships, the next (Chapter 6) with
challenges facing SMEs, and then Chapter 7 discusses
their use of advisers. In each of these chapters the
analysis covers three perspectives. The first two of
these take the data from the SME survey and analyse
these from both a country-based perspective and a
size-based perspective and then identify which of the
two aspects is the driving factor in the responses
obtained. The third perspective is that of the
accountants in each of the countries, and here the
results are interwoven into the analysis in order to
provide either contrasting or confirmatory evidence or
to provide possible explanations for the differences
identified in the SME data sets. Where appropriate, the
reader is referred back to the introductory sections on
country-based differences in the banking and
accounting profession structures.
Chapter 8 brings together the results of the analysis
and presents conclusions, putting these into the context
of the countries concerned. It identifies areas for further
research and issues for consideration by the banking
industry, the accounting profession and policy makers.
Introduction (continued)
PAGE 13
In any inter-country research it is important to
recognise that the context of each country will have an
effect on the answers obtained from the participants in
the research. This overview does not claim to be
comprehensive nor are any claims made about the
precise accuracy of any of the percentages quoted, as
the sector is dynamic and changing to a greater or
lesser extent in each of the countries included in this
report. The intention is to provide the reader with a
broad overview of the banking structures and the
context in which small business finance operates within
each of the countries.
2.1 GERMANY
The structure of the banking industry – overview
The German banking system has a decentralised
composition and relatively low concentration. The
structure of the German banking industry is
fragmented, comprising the large commercial banks,
the savings banks, the cooperatives and the
development banks. One distinctive characteristic of
the German banking market is the significant presence
of non-commercial banks. The public-sector banks
occupy the largest market share in terms of total
assets; the Sparkassen (savings banks) and
Landesbanken (regional state banks) enjoy over 34%,
while the inclusion of state-owned mortgage banks,
special purpose banks and development banks brings
the public sector influence to 45%. The non-
commercial Genossenschaftsbanken (cooperative
banks) also hold a considerable market share of
approximately 15%, leaving the commercial banks with
28% in terms of total assets (Audretsch and Elston,
1997). The large commercial banks tend to serve
German public companies (AGs) and make a significant
proportion of total loans to banks nationally and
internationally (Weber 2002). The non-commercial
banks as a whole are particularly dominant in the
Mittelstand (small and medium-sized firms) sector and
are noted for their prevailing presence on the high
street (Rushton 2004). The situation in Germany is
undergoing considerable change, with an increasing
presence of foreign banks and the abolition of state
guarantees for its public sector banks, making it an
even more attractive market for foreign banks.
SME banking providers
The need for financing of this sector has mainly been
satisfied by the Sparkassen and
Genossenschaftsbanken. Vitols (1998) suggests a
three-tier structure of both the savings and cooperative
banks.
• The savings banks consist of a bottom tier of local
banks typically owned by the city in which they are
situated, where both the bank and the local
government are mutually dependent.
• The middle institutional tier comprises financial
intermediaries, including Landesbanken (regional
state banks), with the main function of accessing
national capital markets and offering consultancy to
the savings banks.
• The third tier serves on a national level and offers
access to national and international capital markets.
The cooperative banks, which originated from craft
societies and agriculture, also display a three-tier
structure; the bottom tier consists of local banks that
are mostly owned by SMEs themselves (always a large
number of shareholders with basically no significant
influence on the bank’s commercial direction). The
middle-tier offers regional services, including training, to
the bottom tier, and the top tier adds general structure.
Government support and banking
Government support in financing the Mittelstand is
delivered through the banking system. A network of
subsidised loans and loan guarantees are made
available to the SME’s main bank, which is commonly
2. Banking structure and characteristics
PAGE 14
referred to as the Hausbank, by referring qualifying
applications to guarantee banks (Burgschaftsbanken) or
development banks such as the Kreditanstalt fur
Wiederaufbau (KfW) (Mullineux 1994). Government-
backed subsidised loans and grant funding are offered
in wide-ranging formats depending on regional locality,
size of business, age of business and industry. The KfW
is partly state funded and, by virtue of their state
backing, the development banks such as KfW enjoy
positive credit ratings and can raise finance cheaply
(Mullineux 1994). The Hausbank forwards successful
loan applications to the KfW, which then supplies the
finance in return for a guarantee (up to 85%). The
Hausbank retains the default risk and receives a
premium of approximately 1% of the total loan amount
per annum to cover running costs. The relationship is
mutually reinforcing, as the KfW requires the bank
guarantee to make funding available and the bank is
able to ‘refinance’ the principle instead of using the
deposit base.
Banking and SMEs – other factors
It is important to note that references are frequently
made to the Mittelstand rather than to SMEs. The
Mittelstand refers to family-owned and managed
businesses with a turnover of up to a few hundred
million Euro. This is larger than the definition of small
firms in other countries.
In Germany, the cost of loan finance is reported to be
relatively cheap compared with countries such as the
UK and the US. This feature is intrinsic to an economic
environment noted for stability and a low failure rate of
small firms. There are several possible explanations for
this. First, the prevalence of non-profit making banks in
the SME market results in cheaper financing costs than
their counterparts in, for example, the UK and US
(where commercial banks cater for SME financing
requirements). Secondly, German banks have a greater
propensity to offer long-term loans at fixed rates, the
outcome of which is reflected in lending costs. Thirdly,
the competition between the Sparkassen and
Genossenschaftsbanken on one side and the
commercials banks on the other historically resulted in
lower borrowing costs compared to other countries.
Another possible explanation concerns the acceptable
risk levels of proposals. A study by Midland Bank plc
(1994) suggested that German banks whittle out riskier
proposals early on in the decision process, thus lending
only to sound propositions. Furthermore, the sharing of
risk between institutions reduces the vulnerability of
one individual loan provider and thereby allows a lower
risk premium to be included in the cost of borrowing.
2.2 HONG KONG
The structure of the banking industry – overview
The Hong Kong banking industry is highly competitive
and decentralised. Hong Kong operates a free market
economy with minimal government intervention and
bureaucracy. The tax system in Hong Kong is also
exceptionally favourable and simple. This has
encouraged substantial investment from international
banks and significant growth opportunities.
International banks from over 30 countries operate in
Hong Kong, including 71 of the 100 largest banks in
the world (www.tdctrade.com). The structure of the
Hong Kong banking industry is organised in three tiers;
licensed banks, restricted licence banks and deposit
taking institutions (www.tdctrade.com); branches of
foreign banks are also significant to the market. Only
licensed banks are permitted to offer savings and
current accounts, and there are 24 such banks in Hong
Kong. The KPMG Banking Survey Report (2004) found
that in terms of market share by net assets the licensed
banks held the greatest proportion (57.4%), followed
by foreign bank branches (40.9%), restricted licence
banks (1.3%) and then deposit-taking companies
(0.4%). In 2006 there are 208 authorised institutions
(AIs) which are regulated by the Hong Kong Monetary
Authority (HKMA). The top five largest banks in terms
of net assets are Hong Kong Shanghai Bank (HSBC),
Banking structure and characteristics (continued)
PAGE 15
Bank of China (Hong Kong), Hang Seng Bank Ltd,
Standard Chartered Bank and Bank of East Asia.
SME banking providers
Because of the highly competitive structure of the
banking industry, SMEs in Hong Kong have a large
choice of potential providers. It is not clear to what
extent foreign banks participate in the SME market. If
experience in the UK (Berry et al. 2003) is mirrored in
Hong Kong they are unlikely to play a significant role in
banking for SMEs, leaving this to the local banks with
the branch networks and infrastructure to support this
type of banking relationship.
Government support and banking
The Hong Kong government offers significant assistance
by way of funding and business advice. Many of the
government-funded services are offered to all firms
regardless of size or origin. Because SMEs constitute
98% of private sector organisations, however, such
schemes are used mainly by SMEs. There are four main
schemes offered by the Trade and Industry department:
the loan guarantee scheme, the export marketing fund,
the training fund, and the development fund. The loan
guarantee scheme is divided into three separate
initiatives according to purpose: Business Installation
and Equipment Loans, Associated Working Capital
Loans and Accounts Receivable Loans. The maximum
loan per SME for the Business Installation Loan scheme
is HK$2 million for a period of five years; Working
Capital Loans are available for up to HK$1 million for
up to two years. The export marketing fund requires the
SME to match government grant funding with a
maximum of HK$40,000 and the training fund offers
grant funding up to HK$30,000. The development
fund is available only to not-for-profit organisations and
research institutes that fulfil certain criteria.
Banking and SMEs – other factors
In 2004 the Hong Kong Monetary Authority launched
the Commercial Credit Reference Agency (CCRA) to
collate information on the financing structure of small
firms. The aim of the CCRA is to give SMEs better
access to finance and to reduce risk for the banks. This
would seem to indicate that there is some concern with
the current situation from both an SME and a banking
perspective.
2.3 SPAIN
The structure of the banking industry – overview
The Spanish banking structure is highly concentrated
within the retail banking market, with the two largest
operatives maintaining 80% of commercial banking
assets (Economist Intelligence Unit 2005). Despite the
concentration and dominance of the two largest retail
banks, a strong network of regionally based savings
banks (Cajas) and smaller specialised commercial
banks has ensured a competitive environment.
Geographically, Spain is strongly regional, and the
regions have fostered a specialised banking
environment according to location. The 17 regions
maintain autonomous control over local banks, as well
as funds allocated by central government, and are
protected from takeover.
The commercial banking sector is dominated by the
two most significant retail banks: Banco Bilbao Vizcaya
Argentaria (BBVA) and Banco Santander Central
Hispano (BSCH), although 78 retail banks exist
(Crowley 2004). The commercial banks have
traditionally focused on large corporate customers,
leaving personal banking and smaller-firm facilities
mainly to the savings banks. Despite a tradition of
oligopolistic dominance by the commercial banks,
deregulation over the past decade has created a
competitive environment. The effect of deregulation has
been an increase in the domestic branch networks of
the savings banks while the commercial banks have
followed strategies of diversifying into international
markets and merging with competitors (Kumbhakar et
al. 2001). Despite the deregulation and consolidation
Banking structure and characteristics (continued)
PAGE 16
of the industry, the dense branch network may still be a
significant barrier to entry from international
competition unless, like Barclays,2 they are prepared to
invest heavily in a branch network.
SME banking providers
A system of mainly state-owned and specialised
savings banks facilitates finance through a variety of
schemes, including some part state-securitised
guarantees. These savings banks have historically been,
and remain, the main provider of finance for SMEs.
Since 2000, however, commercial banks such as
Banco Popular have successfully sought to serve this
market by bundling services at competitive rates and
offering an alternative to the regional savings banks.
The savings banks sector originated in the nineteenth
century to serve the general public. The banks have
traditionally been owned by the state and run by local
committees and thus they have avoided pressures from
shareholders to pursue profits. The deregulation of the
banking structure at the turn of the present century has
allowed the savings banks to restructure their capital
and issue ‘participating stakes’ to private investors
(without voting rights) to raise finance (The Economist
(US) 2002). The introduction of such participating
stakes and the opportunity to raise finance through the
stock market may strengthen the position of the savings
banks but may also result in a more profit-oriented
approach to lending. The implications for lending to the
SME sector (their core business) are yet to be seen.
The savings bank market currently consists of
approximately 47 banks (Kirkman 2003), with the two
largest being La Caixa and Caja Madrid (Economist
Intelligence Unit 2005). The savings bank network
controls 50% of all banking deposits and thus holds
significant importance; furthermore, the savings banks
account for 46% of non-corporate lending (Wise 2005)
and are self-financed.
Government support and banking
As noted above, the savings bank network is the main
supplier of finance to the SME market through loans
and government funding, as well as benefiting from
federal loan guarantee schemes. Specifically, loans to
SMEs can be guaranteed through the Instituto de
Crédito Oficial (ICO), which is the state-owned credit
agency. The ICO funds support and investment in SMEs
to promote innovation and technological advance,
mainly in regions where state assistance is prevalent.
The finance is guaranteed in some cases by the
Kingdom of Spain and in others by the European
Investment Bank (depending on the purpose of funding
and loan structure). Valid comparisons with other
countries are problematic, although it appears that the
structure of guarantee schemes is less complex than
that of those found in Germany, for example, and such
schemes are more common than in the UK.
Banking and SMEs – other factors
Evidence from the Spanish banking literature suggests
that the existence of long-term banking relationships
increases the availability of debt finance but does not
result in reduced costs (Cardone et al. 2005). SMEs in
Spain have an average of 4.5 banking relationships
with an average duration of six to ten years’ duration
for small and medium-sized firms and three to five
years for micro-firms (Cardone et al. 2005). The core
banking needs of SMEs appear to be satisfied by the
savings banks’ dense branch networks (exceptions to
this include specialised mortgage banks and banks
supplying finance to agriculture). The result of
increasing competition has been the continuous pursuit
of new products to maintain customer loyalty (Crowley
2004).
Banking structure and characteristics (continued)
2 Barclays has established a branch network of more than 5,000 branches in Spain.
PAGE 17
2.4 UNITED KINGDOM
The structure of the banking industry – overview
The structure of the UK banking industry was seen as
segmented up until the mid 1990s. Traditionally, the
banking industry could be split according to its
functions; for example retail,3 merchant banking and
building societies. In 2006, although the market is
dominated by four large ‘retail’ banks, each of these
banks conducts many of the main banking functions
under one organisation (Howells and Bain 2004).
Therefore, to understand the structure of the UK
banking industry it must be noted that the large
banking groups perform more than one activity and the
industry is characterised by a small number of
heterogeneous suppliers (Buckle and Thomson, 1998).
The most prominent players in UK banking are the ‘big
four’: Barclays, HSBC, RBoS-NatWest, and Lloyds-TSB
(Howells and Bain 2004), all of which are commercial,
profit-making organisations. Each of these banks offers
a wide range of services, from retail banking to
investment banking, for both businesses and personal
customers. The ‘big four’ banks hold around 84% of
market share between them with roughly equal
distribution (Lund and Wright 1999). The current
banking structure has evolved from a number of
mergers and acquisitions; one criticism of the industry
is a lack of competition due to aggressive merger
activity and an oligopolistic environment.
SME banking providers
Because of the dominance of the ‘big four’ it is hardly
surprising that the SME sector is largely banked by
these banks. Since the mid 1980s, building societies
and, to a lesser extent, Internet-based banking
providers have been active in the SME market. In the
case of building societies and ex building societies, the
main area of finance offered initially was commercial
mortgages, although some have now extended the
range of services offered. Despite these changes the big
four are still dominant, with a market share of around
80% (Cruickshank 2000; Fraser 2004).
Government support and banking
The government has taken steps to support the SME
sector through organisations such as the Small
Business Service (SBS). One of the key issues for the
SBS is the availability of finance. As an attempt to
encourage banks to lend to SMEs, the SBS offers a
small-firm loan guarantee scheme where a loan is
applied for through the retail banks and 75% is
guaranteed by the government. The scheme enables
firms with insufficient security to obtain bank loan
finance. Other forms of finance available to SMEs
include grant schemes. Grant schemes are available
from a range of sources and are intended for a specific
purpose, although they tend to be concentrated in
certain key sectors and usually require the firm to
‘match’ funds given.
Banking and SMEs – other factors
A wealth of research suggests dissatisfaction within the
small firm community with the availability of finance
(Bolton 1971; Cruickshank 2000). In the UK, SMEs
have found difficulty in obtaining finance because of
information asymmetry;4 the firm owner generally has
better performance information than the bank when
seeking finance (Lund and Wright 1999). Furthermore,
bank lending criteria have been seen as incongruous
with SMEs’ specific circumstances and often
unachievable. A body of evidence suggests that this
climate is now changing. The Bank of England report
(2004) suggests that there is a greater awareness by
the banks of the unique set of problems faced by
SMEs, and better communication, and it indicates that
past difficulties are gradually improving. This is in line
with the finding of general satisfaction (Fraser 2004).
3 Retail includes banking for SMEs.
4 As will be seen later in this report, it is worth noting that because SMEs outside the UK tend to have more banking relationships the problems of information asymmetry are likely to be more pronounced elsewhere.
Banking structure and characteristics (continued)
PAGE 18
Fraser (2004) shows that nearly 60% of UK SMEs
have a single banking relationship. This may be
explained in part by the range of financial products
offered by the main banks, either directly or through
their associated non-bank subsidiaries. Services such
as asset finance and factoring have seen significant
growth since the mid 1990s, and this has been
matched by a decline in traditional bank finance from
around 60% in the late 1980s (Lund and Wright
1999) to around 50% in 2006.
2.5 UNITED STATES OF AMERICA
The structure of the banking industry – overview
The structure of the US banking industry is a product of
continual reform and the fear of centralised
governmental control and domination of monetary
interest (Howells and Bain 2004). The market-based
banking system is dominated by the commercial banks,
but a large number of savings associations, mutuals
and credit unions also operate within the market. The
large numbers of banks that characterise the US
banking industry are the result of locational restrictions
placed upon banks until 1994. In 2000, 8,315
commercial banks operated in the sector, despite a
large reduction due to mergers and acquisitions around
the turn of the present century (Howells and Bain
2004). Mishkin (2002) also estimates that 1,200
savings and loan associations, 400 mutual savings
banks and 12,000 credit unions are present in the
sector. Although the commercial banks as a group are
the largest in terms of deposits, the top ten banks
account for just under 60% of the total assets of the
industry (Mishkin 2002). The five largest commercial
banks are Citicorp, Chase, Bank of America, Wachovia/
First Union, and Wells Fargo (Mishkin 2002).
The US has a dual banking system; banks are either
chartered by individual states or by federal government.
Until 1994 few states permitted banks that operated in
other states to open branches. This led to a situation
where a multiplicity of banks operated in the US but
not across the US. The rationale for this was rooted in
a fear of central governmental control. One of the
perceived advantages of the large number of banks was
greater competition. The counter argument was that
inefficient banks remained in business owing to a lack
of effective competition. In some areas, the lack of
competition created localised oligopolies and even
monopolies. The Interstate Banking and Branching
Efficiency Act (IBBEA) passed in 1994 permitted banks
to form interstate branch networks. The passing of the
Act marked a significant shift in the US banking
industry, with a trend towards mergers and
acquisitions, particularly in the commercial banks. This
trend towards merger continues today. Deregulation has
achieved the aim of greater competition but economies
of scale and larger numbers of banking relationships
appear to have had a negative effect on credit
availability to small firms (Strahan and Weston 1998).
SME banking providers
The providers of most finance are the local and regional
banking organisations that provide a more personalised
service than the national-level banks. The sector is
continually changing, with local banks being merged or
bought out to form larger regional banks, and new local
banks entering the market. It would appear to be the
case that as an SME grows it is likely to need to change
banks in order to access the increased finance required
by its growth.
Government support and banking
Small firms in the US can also access finance from
grant schemes and favourable rate loans. Although the
federal government does not offer any grant schemes,
individual states operate differing schemes depending
on industry and purpose. The Small Business
Administration offers a loan guarantee scheme through
the commercial banks for small firms that cannot raise
finance by themselves. The scheme will lend up to $2
million with a maximum guarantee of $1 million. Other
Banking structure and characteristics (continued)
PAGE 19
small-firm loans include the Certified Development
Company scheme, which offers fixed interest rate
borrowing with up to 100% guaranteed, and the
Microloan programme for newly established firms. In
addition, there are specific schemes to support start-
ups among ethnic minorities and female entrepreneurs.
Banking and SMEs – other factors
Debt finance is the primary source of funding for small
firms. Research by Small Business Administration
(2005) found that in 1998 there was a total of $700
million of outstanding credit to small firms. Of this,
57% originated from the commercial banks, 12% from
owners’ loans and 11% from other finance companies.
Contextually, the commercial banks lend the most
significant amounts of money to small firms. Research
also suggests that small firms in the US engage in few
banking relationships, often with only one bank
supplying finance (Strahan and Weston 1998). Small
firms build long-term relationships with their banks and
thus overcome difficulties of information asymmetry.
Peterson and Rajan (1994) suggest that the banking
relationship is vital to securing lower interest rates and
assessing credit worthiness. The banking relationship
appears to have been a casualty of consolidation within
the industry, in that harmonising practice across branch
networks has resulted in an increase in the number of
relationships and increased risk exposure. Previously,
bank managers were able to monitor portfolios of small
firms more closely and potentially offer tailored finance.
It is now more likely that standard packages are offered
and centrally controlled and monitored.
Banking structure and characteristics (continued)
PAGE 21
Although accountants and lawyers exist in all countries
included in the study there are subtle differences in the
organisation of the professions, the rules and ethics
governing their work and the roles they traditionally
undertake. This chapter provides a brief overview of the
differences that are pertinent to this study and the
interpretation of the results contained herein.
3.1 GERMANY
The profession
For simplicity, the German professional area can be
characterised as having two distinct parts; the auditing
profession (Wirtschaftsprüfer) and the tax advisers
(Steuerberater). This broad characterisation covers such
subtleties as taking the exams to become a tax adviser
part way through the training to be an auditor. Most, if
not all, auditors could therefore practise as tax advisers
but tax advisers cannot do audits. In practice, for the
purposes of discussing SMEs, the broad categorisation
generally works because although one can be a tax
adviser and accountant to a business one cannot also
be an auditor. The audit function has to be clearly
separated. In Germany, as in other EU countries, the
requirement for audit has been removed from all
companies that fit within the EU definition of a small
business.
All businesses, irrespective of size, have to produce
accounts for tax purposes and a further set as required
under EU company law, although the level of
compliance by small businesses with the latter
requirement is still very low in Germany; our focus
group (see Chapter 4, Research method) put it at
around 5%. This, they argued, was related to
competition and sensitivity around financial
information, especially where firms were producing only
a single product.
The tax accounts are not generally available to the
public but may be used by the banks. They are
prepared by tax advisers/accountants owing to the
complexity of the taxation regulations. One has to be a
qualified accountant to produce the accounts and must
sign the accounts with a declaration. These
declarations range from a statement saying that the
accounts were prepared from the information provided
through to a partial audit.
In effect, this means that for most small businesses
preparation of these accounts is outsourced to a
qualified tax advisor (mostly) or accountant (sometimes).
The small business market is essentially served by local
and regional accounting firms; the ‘big four’ are
interested only in the top end of the Mittelstand market.
Definitions of small businesses
In Germany, although the EU definitions of small and
medium-sized firms are adopted, there are issues
around the use of these definitions. Traditionally in
Germany there has been a distinction made between
businesses based upon ownership and access to and
use of external capital. Thus the public companies
(AGs) would raise money on the capital markets
whereas the Mittelstand, which range in size from very
small to very large, do not. This has led to issues in
Germany in relation to the adoption of common
definitions. These are exacerbated by tradition on one
hand and access to EU funding and grants, where EU
definitions prevail, on the other.
3.2 HONG KONG
The profession
The profession in Hong Kong largely reflects that found
in the UK, with accountants being members of a
recognised professional body. The Hong Kong Institute
of Certified Public Accountants (HKICPA) regulates the
profession and in order to carry out audit work an
accountant requires a practising certificate. This is
issued by the HKICPA. As is the case in the UK, the
professional bodies have a code of ethics covering
accountants’ services to clients and the extent to which
3. The accounting profession and its role
PAGE 22
they can provide audit. These ethical guidelines are less
formal and clear cut than in Germany but still comply
with the same basic premise that in order for the audit
report to have value there is a need to establish the
independence of the audit function from the work of
accounts preparation and tax work.
All companies incorporated under the Companies
Ordinance are required to produce accounts with an
auditors’ report. There is no audit threshold exempting
small audits.
For tax purposes, there is a concession to small
corporations where the total gross income of the
business does not exceed $HK500,000 for the basis
period: it is not necessary to submit the supporting
documents when lodging the Tax Return. These
supporting documents include the audited accounts,
although the companies still need to prepare these
documents upon completion of the Tax Return and the
Inland Revenue Department may request the
companies to submit these documents.
Definitions of small businesses
Small firms are defined by the Trade and Industry
Department as manufacturing firms with fewer than
100 employees and non-manufacturing firms with
fewer than 50 employees.
3.3 SPAIN
The profession
Spain has three professional accountancy bodies and
separate from these is the audit profession, which is
regulated through the Institute of Auditors. The latter
comes under the Ministry of Trade.
Accountants cannot prepare the accounts and audit a
company. A single accountant cannot provide tax,
accounting and audit services to a company so the
profession is organised into separate entities for each of
these functions.
All businesses have to produce accounts in line with
EU law and these have to be prepared by qualified
accountants. In accordance with EU law, the content
and the extent of disclosure in the accounts vary
according to the size of the business. In general, small
companies are not subject to audit although this may
be required for their own purposes or for tax purposes.
In addition, banks may require audited accounts as a
condition of a loan.
The structure of the profession mirrors that found
elsewhere, ranging from a sole practitioner through to
the ‘big four’. In Spain the ‘big four’ are active in every
market, including SMEs.
Definitions of small businesses
Spain has adopted the EU definitions, which are
probably the definitions most widely used by
accountants and bankers.
3.4 UNITED KINGDOM
The profession
The UK has a number of professional bodies with three,
the Institute of Chartered Accountants in England and
Wales, the Institute of Chartered Accountants in
Scotland and the Association of Chartered Certified
Accountants, being involved as ‘public accountants’
providing services to the business community as
external accountants.
As is the case elsewhere, there are clear professional
guidelines on the separation and independence of the
audit function from other advisory and preparation
functions, although as mentioned with respect to Hong
Kong these are somewhat less formalised in law than is
the case in Germany and Spain.
The profession ranges from sole practitioner through
small and medium-sized practices to the ‘big four’. The
majority of work at the smaller end of the SME market
is provided by the smaller accounting practices, with
The accounting profession and its role (continued)
PAGE 23
the national practices targeting the medium to large
firms and the ‘big four’ targeting listed companies and
global businesses.
All businesses, irrespective of size, have to produce
accounts for tax purposes and a further set, as required
under EU company law, has to be lodged at Companies
House. As is the case in the rest of the EU, small
businesses as defined by EU law are exempt from the
requirement to produce audited accounts.
Definitions of small businesses
Although legally the EU definitions of small and
medium-sized firms are adopted for financial reporting
purposes it is doubtful that they have been universally
adopted, especially in the case of small firms, where a
plethora of differing definitions and classifications exist.
For medium-sized firms the EU definition of up to 250
employees has gained more general acceptance.
3.5 UNITED STATES OF AMERICA
The profession
The accounting profession in the US is dominated by
Chartered Public Accountants (CPA). In order to
practise as an auditor one has to be a CPA. The
profession has very clear rules, to which all CPAs have
to adhere, on the separation of work. Hence
preparation (compiling) of accounts has to done by a
different CPA from the one who does the audit.
There is a clear distinction in the US between three
levels of professional accounting work for clients. The
first, and simplest, level is compilation, whereby the
accountant compiles the accounts on an ‘Other
statutorily accepted basis’. Generally, this is the one
accepted for tax purposes. Above this level there is a
review of accounts where the accounts are compared
with previous years’ figures and industry norms but no
formal audit work is carried out. The final level is a full
audit.
Small companies are exempt from any formal
requirement for audit or for producing a set of financial
statements, although they must all produce a set of
financial statements for tax purposes.
The profession consists of a range of firms of different
sizes, ranging from the sole practitioner, through local
firms, regional firms to national firms and international
firms right through to the ‘big four’ accounting firms. As
is the case elsewhere, the small business market tends
to be the preserve of local firms, with national and
international firms targeting large and very large
corporations.
Definitions of small businesses
It would appear that there is little agreement on a
common definition of a small or medium-sized business
as it is argued that this varies by industry. Interviewees
(see Chapter 4) offered the following definitions of an
SME:
• a company that is not publicly traded
• a company with fewer than 100 employees
• a company with fewer than 50 employees
• it varies from industry to industry, but anything with
less than a $100 million turnover is probably an SME.
In its survey of small businesses, the NFIB (2004)
includes all those businesses with fewer than 250
employees.
The accounting profession and its role (continued)
PAGE 25
The study consists of three components. The first
concerns the background to the banking industry, the
accounting profession and the country-specific context
within which the SME is domiciled. The second part
covers SME responses from five countries to a
standardised questionnaire and the third looks at the
views of accountants in those countries on issues
related to SMEs and their banking and accounting
relationships.
The background contextual data (See Chapters 1 and
2) were collected using desk-based research of a wide
range of banking texts, refereed journal articles and the
professional press. This work was then confirmed and
supplemented in discussions with members of the
accounting profession in the countries concerned.
These chapters cannot and do not claim to be
comprehensive. Instead they offer an overview of
pertinent issues within banking and the accounting
profession in each of the countries.
The second tranche of data is based upon a survey of
SMEs carried out by telephone interviews using a
standardised questionnaire. The questions posed in the
questionnaire were drawn from other survey work such
as that mentioned in Chapter 1 above and from issues
identified in the small business literature, in particular
that relating to SMEs and their banking relationships
and the role of accountants for SMEs.
Dunn and Bradstreet were asked to provide details of
2000 businesses that were representative of the SME
population in each country. The SMEs included in this
sample were than contacted by telephone and asked to
take part in the survey. The survey company was
required to obtain 200 responses from each country
using the Dunn and Bradstreet sample as the base
population. The respondents were the main financial
decision makers within the organisations. In total,
1,004 responses were obtained from SMEs in five
countries, Germany, Hong Kong, Spain, the UK and the
US, with approximately 200 respondents from each
country. As would be expected from such a data
collection technique, the sample obtained is not fully
representative of that population. Small business
owners are often far too busy with running the business
to take part in this type of work whereas a bigger SME
with more employees is more likely to be willing and
able to spend the time required to respond. The sample
is therefore biased away from the smaller end of the
SME spectrum. Hence it is not claimed that the sample
is representative of the SME population in each of the
countries surveyed. The objective here was to provide
an inter-country comparison rather than to replicate
other country-specific work such as that carried out by
the Centre for Small and Medium-Sized Enterprises in
the UK (Fraser 2004).
The analysis of the data was carried out using SPSS
(Statistical Package for the Social Sciences). Where
appropriate, comparisons are made with other work,
but because of the differences in underlying samples
these comparisons should be treated with caution.
The final stage was to collect data in each of the five
countries from accountants who work directly with
SMEs and can therefore claim some expertise in the
area of the challenges and opportunities faced by their
business clients. In this area there are considerable
difficulties obtaining access to ‘professional’
accountants as they are represented by different
professional bodies in each country and in many cases
by more than one professional body. As a result, the
approach taken here was to collect independent data
using a similar research instrument with comparable
questions where access to a large number of
accountants was feasible. This was the case in the UK
and Hong Kong, where access to members of ACCA
was provided. The data collected from these countries
were independently analysed and then compared with
the data from the SME survey to provide confirmatory
or complementary evidence and views. These data
were analysed using a combination of SPSS and Excel.
4. Research method
PAGE 26
In the other three countries, because of difficulties in
accessing a large enough population of qualified
accountants to make survey work valid, it was decided
to adopt a different but complementary approach
whereby interviews and focus groups were undertaken
with five or six accountants. In Germany, Spain and the
US, accountants concerned with SMEs were identified
through representatives of the accounting professions in
each of these countries who are concerned with
international bodies focusing on SMEs and accounting
reports. In Germany and Spain a focus group consisting
of accountants dealing directly with SMEs and those
concerned with accounting regulation and SMEs was
set up. The focus group meeting in each country was
organised around a set of focusing questions and
issues, including a discussion of the findings of the
SME survey. In the US it was not possible to find a
convenient time to bring together a focus group so here
the approach adopted was to interview the prospective
members of the focus group individually. The aim of the
focus groups and interviews was partly similar to that
for the accountants’ surveys in the UK and Hong Kong,
in so far as a part of the discussion was concerned with
collecting confirmatory evidence. Because of the timing
of the data collection, however, it was also possible to
explore, in some depth, the reasons for differences
between countries that had been highlighted in the
initial analysis of the SME data (Berry 2006).
The focus groups in Germany and Spain were taped
and analysed against the original set of targeted
questions and issues. During the focus group
discussions, as would be expected, contrasting views
were expressed and in some cases a consensus was
reached while in others differing views still existed. This
is reflected in the analysis and the commentary in the
report. In the US, the approach adopted was to use the
interviews in a similar way to the focus groups by
checking out contrasting responses with subsequent
interviewees to provide explanations of differences
between the participants. The interviews were then
analysed and the results reported in the same way as
for the focus groups. In this way these results can be
seen as providing confirmatory evidence of the SME
data and insights into different views within countries
as well as insights into the reasons for the SME
responses from different countries.
4.1 THE SME RESPONDENTS
The paragraphs below set out the main characteristics
of the respondents. Fig. 4.1 provides an overview of
the total population as measured by turnover.
A breakdown of the turnover categories analysed by
country is shown in Table 4.1 (see page 26). As can be
seen from that table, there are differences in the size
profile of different countries’ respondents. For example,
the US and Spain at 20% and 22% respectively have
more micro businesses (ie those with turnover of less
than £50,000 equivalent) included in the respondent
sample than other countries. Similarly, Germany has a
lower percentage of respondents with businesses in the
£10 million to £25 million category than the other
countries. Nonetheless, taking the percentages with
turnover of less than £500,000 or equivalent
compared with those with more than £500,000, each
country has approximately the same split, at around 50%.
Fig. 4.2 provides an analysis of the total population of
respondents by number of employees as an alternative
proxy for size. This is then broken down on a country-
by-country basis in Table 4.2. As one might expect,
there is a strong relationship between turnover and
number of employees. About 80% of micro businesses,
ie those having turnover under £500,000, have fewer
than 10 employees, while those with greater turnover
generate more employment. The crossover point from
being essentially a micro business in terms of
employment would appear to be in the £500,000 to
£1,000,000, or equivalent turnover, range.
Research method (continued)
PAGE 27
£10 million – £25 million (10%)
£5 million – £10 million (13%)
£1 million – £5 million (16%)
£500,000 – £1 million (11%)
£250,000 – £500,000 (14%)
£50,000 – £250,000 (21%)
Less than £50,000 (15%)
Figure 4.1: SME sample by turnover
Owner only (4%)
1–4 (3%)
5–9 (8%)
10–19 (10%)
50–99 (9%)
50–99 (16%)
100–249 (17%)
250–499 (23%)
Figure 4.2: SME sample by number of employees
Research method (continued)
PAGE 28
Size Total sample UK Germany Spain Hong Kong US
% % % % % %
Less than £50,000 15 4 12 22 16 20
£50,000–£250,000 21 26 22 18 16 23
£250,000–£500,000 14 18 18 9 17 8
£500,000–£1 million 11 7 13 8 17 8
£1 million–£5 million 16 19 13 18 11 23
£5 million–£10 million 13 12 17 14 10 11
£10 million–£25 million 10 14 5 11 13 7
Total 100 100 100 100 100 100
Less than £500,000 50 48 52 49 49 51
More than £500,000 50 52 48 51 51 49
Table 4.1: SME respondent size measured by turnover
Employees Total sample UK Germany Spain Hong Kong US
% % % % % %
Owner only 4 5 3 2 0 10
1–4 23 31 31 20 12 21
5–9 17 17 19 20 17 13
10–19 16 15 17 13 21 12
20–49 19 14 13 22 25 23
50–99 10 7 9 11 12 11
100–249 8 7 7 8 10 7
250–499 3 4 1 4 3 3
Total 100 100 100 100 100 100
N= 1004 203 200 201 200 200
Table 4.2: SME respondent size measured by employee numbers
Research method (continued)
PAGE 29
4.2 MARKETS
Table 4.3 summarises the various markets in which the
SMEs operate. It is worth noting that many of the
companies surveyed operate in more than one of these
markets. Looking at the results in Table 4.3, although
one might expect the UK and Hong Kong to be similar
in relation to internationalisation, as both are island
nations operating in small currency markets, the
internationalisation of Hong Kong company markets is
much higher than that in the UK. Interestingly, the
percentage of UK SMEs operating in the national
market is higher than that indicated by the equivalent
responses from other countries. It is perhaps worth
noting that there is some correlation between the
markets in which SMEs operate and their responses to
some of the questions posed, especially in relation to
the use of banking services relating to foreign currency
and international trade.
Market Total sample UK Germany Spain Hong Kong US
% % % % % %
Local 49 46 48 50 47 57
Regional 36 32 40 41 31 37
National 36 49 25 43 26 33
International 34 37 24 29 51 28
Table 4.3: Markets in which SMEs operate by country
Research method (continued)
PAGE 30
4.3 SECTORS REPRESENTED
Table 4.4 sets out the sectors represented in the
sample. Points worthy of note are the relatively low
percentage of manufacturing in the UK and German
samples, the high percentage of wholesaling and
retailing in the UK sample and the relatively high
involvement in construction and public-service-related
industries in the German sample.
An analysis of the sector-related data by size, Table 4.5,
shows that there is a wide spread across sectors in all
size ranges. Nonetheless, some patterns are apparent,
with the personal and leisure services, as well as
business services, being more prevalent at the smaller
end of the SMEs included in the sample.
Table 4.4: Sector analysis by country
Total sample UK Germany Spain Hong Kong US
% % % % % %
Agriculture 2 2 3 3 1 3
Production or manufacturing 33 25 24 39 39 34
Construction 9 9 12 8 6 7
Wholesale or retail 27 34 24 24 28 22
Catering 2 2 4 4 0 0
Transport or communications 4 4 4 4 4 4
Property or finance 4 6 4 1 6 5
Business services 14 14 17 14 13 15
Public admin, health and education 2 1 4 1 2 3
Personal or leisure services 3 3 4 2 1 7
Total 100 100 100 100 100 100
Research method (continued)
PAGE 31
50K 250K 500K 1m 5m 10m
All < 50K –250K –500K –1m –5m –10m –25m
% % % % % % % %
Agriculture 2 1 5 0 2 3 0 4
Production or manufacturing 33 31 24 25 31 40 43 30
Construction 9 10 5 15 9 7 8 9
Wholesale or retail 27 20 23 30 24 26 32 36
Catering 2 5 3 1 5 1 1 1
Transport or communications 4 7 4 5 4 5 2 2
Property or finance 4 2 7 5 18 4 3 5
Business services 14 18 19 14 0 10 9 10
Public admin, health and
education 2 1 5 1 3 2 0 1
Personal or leisure services 3 5 5 4 4 2 2 2
Total 100 100 100 100 100 100 100 100
Table 4.5: Sector analysis by SME size
Notes
For turnover all amounts were converted to their equivalent to the categories above in local currencies. For the tables, turnover is expressed in sterling with categories relating to thousands – £K, and millions – £m.
Research method (continued)
PAGE 32
4.4 THE ACCOUNTANTS’ SAMPLE – UK AND HONG
KONG
Because of issues around access to accountants dealing
with SMEs in each country, different approaches were
taken to the collection of data from accountants,
depending upon the country concerned. In the UK and
Hong Kong an online survey was carried out with
practising members of the Association of Chartered
Certified Accountants. In the UK there were 377
responses, and in Hong Kong there were 127
responses. The online survey mirrored the SME survey
in a number of respects, albeit that the questions were
being answered from a differing perspective. In both
cases some questions were not fully answered but,
looking across the whole research instrument, around
80% of respondents in both countries completed all or
nearly all the questions.
The profile of the accountants’ businesses and their
clients’ businesses are provided in Tables 4.6 and 4.7.
As can be seen from Table 4.6, where employee
numbers are used as the proxy size measure, the
majority of the clients that these accountants deal with
fall firmly within the UK definition of SMEs. A similar
result can be found in Table 4.7 which uses turnover as
the proxy for business size.
The client groups in both countries were, as would be
expected, biased towards the service rather than
manufacturing sector and the majority of clients were
set up as limited liability companies with the relevant
percentages being 67% in the UK and 94% in Hong
Kong, with the remainder being made up of sole
proprietors and partnerships.
Table 4.6: Client base by number of employees
UK Hong Kong
Number % Number %
Micro businesses (0–9 employees) 102 33 17 16
Small businesses (10–49 employees) 140 45 41 39
Medium-sized businesses (50–249 employees) 47 15 27 26
Large businesses (over 250 employees) 10 3 8 8
Mixed sized businesses 14 4 11 11
Total respondents 313 104
skipped this question 64 24
Research method (continued)
PAGE 33
4.5 THE ACCOUNTANTS’ SAMPLE – GERMANY,
SPAIN AND THE US
As has been explained, owing to difficulties in carrying
out extensive survey work in Germany, Spain and the
US, different approaches were adopted. The aims of
the research were slightly altered so that, instead of
obtaining independent evidence for comparison,
confirmatory and explanatory evidence was gathered to
support that already collected from SME respondents in
each of these countries. This allowed the researchers to
get more in-depth knowledge of country-based
differences. In Germany and Spain, the actual data
were collected from a focus group consisting of
accountants whose main business clients were SMEs.
As it was not possible to find a mutually convenient
time to run a focus group in the US, the data were
collected through a series of face-to-face interviews
over a two-day period. In all three countries a common
approach was adopted in terms of the questions asked
and the issues explored.
Table 4.7: Client base by turnover
UK Hong Kong
Number % Number %
Less than £50,000 37 12 20 20
£50,000–£100,000 44 15 13 13
£100,000–£500,000 76 25 28 27
£500,000–£1 million 46 15 8 8
£1 million–£3 million 46 15 10 10
£3 million–£5 million 10 3 6 6
More than £5 million 44 15 17 17
Total respondents 303 102
skipped this question 74 26
Research method (continued)
PAGE 35
This chapter looks at the relationships between SMEs
and their banks, how that relationship is maintained
and the SMEs’ levels of satisfaction with their banks.
5.1 SINGLE OR MULTIPLE BANKING
RELATIONSHIPS
It is clear from Table 5.1 that one factor that is
influential in whether an SME has a single banking
relationship or multiple banking relationships is the size
of the SME. Smaller SMEs are more likely to have a
single relationship than larger ones, with the
changeover point being turnover in the range of
£500,000 to £1 million.
Nonetheless, although the size of the SME is clearly a
factor in the number of banking relationships, a
country-by-country analysis of the firms in the sample
reveals that the ‘norms’ of the country appear to be
more influential. Single banking relationships are the
norm in the UK, as reported by Fraser (2004), while
multiple relationships are the norm in Spain. This latter
finding concurs with the point made in the Observatory
of European SMEs’ report (2004) which states ‘several
southern European countries’ SMEs tend to have credit
lines with more than one bank’ (p. 19). It is also
corresponds with the findings of Cardone et al (2005)
reported in the overview of the banking structure in
that country (section 2.3, page 14). This would seem
5. Banking relationships
Table 5.1: Number of banking relationships
Number of 50K 250K 500K 1m 5m 10m
banking All <50K –250K –500K –1m –5m –10m –25m
relationships % % % % % % % %
1 44 58 60 54 36 40 30 33
2 19 16 22 22 17 20 19 15
3 18 16 13 14 24 20 18 21
4 8 6 3 7 12 7 15 9
5 4 2 1 2 6 6 6 8
6–7 3 1 1 1 2 5 5 7
8+ 3 1 0 0 1 2 7 7
n= 1001 147 210 140 106 167 129 102
Average 1.9 1.7 1.6 1.8 2.2 2.0 2.1 2.0
PAGE 36
to lend weight to the idea that these differences are
country specific rather than size related.5 Fig. 5.1
provides a diagrammatic representation of the
relationship patterns reported by the respondents.
Looking at the graph in Fig. 5.1, Spain stands out as
being the most likely to have multiple banking
relationships followed by Germany. Table 5.2 below
provides details of the average number of relationships
of the various countries and shows Spain with an
average number of relationships of 2.97 compared with
1.37 in the UK.
The figures for the UK, and to an even lesser extent
those for Hong Kong, do not fully mirror the view of the
accountants. In the UK, for example, accountants in
our sample claimed that approximately 40% of their
clients used more than one bank. In Hong Kong the
accountants claimed that 76% of their clients had more
than one banking relationship. This use of multiple
relationships may, in part, result from advice offered by
the accountants, encouraging SMEs to have more than
one banking relationship. As we shall see below, this
was a common factor in both Germany and the US,
where multiple banking relationships were encouraged
to reduce the risk of exposure of the SME to changes in
bank policies.
The German focus group discussions identified the
reasons for multiple banking relationships as threefold.
The first of these is the banking system itself (see
Chapter 2, section 2.1 for details) with regional state
80
70
60
50
40
30
20
10
0
%
1 2 3 4 5 6 7
Number of relationships
UK
Germany
Spain
Hong Kong
US
Figure 5.1: Number of banking relationships – country analysis
5 As was noted in Chapter 4, section 4.1, the business size profiles of all countries are broadly the same with 50% being below £500,000 turnover and 50% above.
Banking relationships (continued)
PAGE 37
banks (Landesbanken), savings banks (Sparkassen), as
well as commercial banks, all operating. The second
was that in the mid 1990s many of the bigger banks
moved out of the SME lending market and SMEs often
had to increase the number of banks they dealt with in
order to get a full range of services. The third reason
identified was that accountants are advising their
clients to have more than one bank so that they are not
overly reliant on a single bank in times when banks are
changing strategies.
‘We now advise [clients] to have more than one
bank… they [the banks] are changing their strategies
more often in the last five years compared to the
previous 30 years… so they try to get rid of SMEs,
private customers…’
Similarly in Spain, the focus group identified a number
of factors that interacted together to encourage multiple
banking relationships. The first of these was the
competitiveness of the banks that are approaching the
companies for business; the second was that the SMEs
themselves shop around for the best deal for each of
their component needs so they may place money with
one bank as it pays higher interest, while using other
services from other banks. Structurally, in Spain the
banks that deal with the small business sector tend to
be small themselves. As a result they ‘tend not to offer
a full range of services’ thus necessitating multiple
banking relationships. An interesting insight was that,
because some banks in Spain require fees to close
accounts, many SMEs, rather than incur those costs,
simply leave the account open while in practice moving
the business account to a new bank.
The picture in the US was slightly more complex as the
industry is still changing by continuing consolidation in
the banking sector and some limited entry of new local
banks. This consolidation has a number of effects, the
first being that the newly consolidated bank may not
wish to deal with a particular market segment, so
creating pressure for an SME to move. The second is
that often the consolidation leads to a less personal and
often remote service in relation to decision making, and
to prolonging the decision-making process, thus
causing SMEs to look for alternatives and back-up
banking facilities. As is the case in Germany, the
accountants themselves are advising clients to think
about multiple banking relationships in an effort to
avoid being ‘left stranded’ by a policy shift at their
bank.
‘They [the banks] are not a partner – they are not an
advocate for the business so they are better off having
multiple relationships – they just want deposits, credit
card fees etc. …you need a back-up bank so that if
the bank decided to get out of the industry sector you
had a back up’.
Country Percentage single relationship Mean number of relationships
Spain 18 2.97
Hong Kong 30 1.85
Germany 39 2.15
USA 66 1.67
UK 78 1.37
Table 5.2: Average number of relationships by country
Banking relationships (continued)
PAGE 38
Another factor leading to multiple relationships was the
competitive nature of the banking market within the
US, with banks offering variable interest rates, free loan
set up, interest on current accounts and a ‘free toaster
or television’! Despite these influencing factors,
however, the majority of SMEs in the US, 60% in this
survey, still have a single bank, which accords with the
findings of Strahan and Weston (1998).
5.2 BANKING RELATIONSHIPS – SERVICES USED
With the exception of current accounts, the services
that are used by SMEs in the sample tend to be a
function of a number of factors: the size of the SME,
the country in which it is based, and the market in
which it operates. As might be expected, the bigger the
organisation the greater the range of financial services
used by that business. In a UK context the low number
of relationships combined with the greater spread of
services used by larger businesses would suggest the
presence of suppliers with multiple products or
services. This accords with the description of the UK
banking structure provided in Chapter 2, section 2.4.
A fuller analysis of the various types of banking service
and their use can be obtained by comparing the results
in Table 5.3 with those in Table 5.4 on page 37. This
shows that the use of deposit accounts and overdrafts
among the sample respondents is influenced more by
country than size. There is relatively low use of deposit
accounts by respondents from continental Europe and
low use of overdrafts in Spain and the US. On the other
hand, it would seem that in Spain there is greater use
of leasing and factoring by the SMEs that responded to
the survey than is the case in other countries. Some of
the other services have multiple factors affecting their
usage. For example, the use of international services,
eg foreign currency, and international trade is a function
of the turnover, trading region (see Table 4.3) and the
country of domicile, with the samples of Hong Kong
and UK SMEs showing the greatest use of these
services. Other differences may be a result of
substitution effects, for example factoring as a method
of financing working capital as a substitute for
overdrafts.
The results for the UK broadly accord with what might
be expected from the survey of accountants, with areas
of difference in both loans and leasing. Here, the
accountants’ responses would lead one to expect a
higher percentage use, as in each of these cases they
answered that more than 60% of their clients used this
type of service. In the case of Hong Kong, the results
from the accountants’ survey would suggest more use
of foreign currency accounts and international trade
services and of leasing.
In Spain, the focus group suggested that the high use
of factoring is due to a combination of factors. The first
is that historically there have been, and still are, tax
advantages in using this form of finance. From the
SMEs’ perspective it also provides the advantage of
getting paid sooner than the norm in a country where
waiting ‘up to four months for payment’ is not
abnormal. From a supply-side perspective, the focus
group commented that banks want to sell high
commission services and factoring provides higher
returns than overdrafts, etc: ‘the banks look at what
gives them the highest commission… so overdraft is
sold less as they make less money on that form of
finance’.
German SMEs have the highest use of overdrafts and
loans, which the focus group suggested was historic
and dated back to the rebuilding of German industry.
In old Germany, it was a public effort to provide
overdrafts for the Mittelstand, the big ones and the
small ones… it was seen as the public duty of the
banks to have this ‘public conscience.
This use of overdrafts and loans was a substitute for
equity and has been encouraged by the tax regime and
the government, and it worked well while there was
Banking relationships (continued)
PAGE 39
Turnover % % % % % % % % % %
Less than £50,000 97 43 37 18 23 14 9 6 21 14
£50,000–£250,000 97 51 41 12 34 18 10 5 23 14
£250,000–£500,000 99 63 49 18 45 26 16 15 25 16
£500,000–£1 million 97 61 47 14 44 39 20 18 34 25
£1 million–£5 million 99 61 47 22 46 27 26 20 36 24
£5 million–£10 million 100 58 64 24 47 32 30 21 48 28
£10 million–£25 milllion 98 73 52 27 47 53 38 38 37 25
Average 98 59 48 19 41 30 21 18 32 21
Table 5.3: Banking services used, analysed by turnover Cu
rren
t
Dep
osit
Loan
Mor
tgag
e
Ove
rdra
ft
Fore
ign
curr
ency
Inte
rnat
iona
l tra
de s
ervi
ces
Trea
sury
ser
vice
s
Leas
e
Fact
orin
g
Banking relationships (continued)
Table 5.4: Banking services used – country analysis
Country % % % % % % % % % %
UK 98 68 31 11 48 34 19 20 29 11
Germany 97 35 56 15 58 9 3 0 32 5
Spain 98 37 33 20 18 11 27 27 50 38
Hong Kong 98 84 49 27 52 74 39 25 27 29
US 97 61 47 20 25 7 10 8 16 16
Curr
ent
Dep
osit
Loan
Mor
tgag
e
Ove
rdra
ft
Fore
ign
curr
ency
Inte
rnat
iona
l tra
de s
ervi
ces
Trea
sury
ser
vice
s
Leas
e
Fact
orin
g
PAGE 40
expansion but started to fail when expansion stopped
and the effects of providing ‘risk capital’ started to be
felt. The financing and tax regimes essentially
encourage the use of debt finance and low levels of
equity. This, therefore, also provides the explanation for
the relatively low levels of deposit accounts: 35%
compared with an aggregate of around 63% in the
other four countries, as it would encourage the
withdrawal of surplus cash in order to keep the equity
base low.
On the low take up of factoring, the group suggested
that this is likely to be caused by a combination of
factors. First, there is a perception that it signals that
the business is in trouble and secondly, as the German
SME owners are mainly engineers and technologists,
they lack financial understanding and sophistication
and would not see trade receivables as a source of
finance. Interestingly, the dominance of engineers and
technologists, and their lack of commercial, financial
and management awareness was a theme running
through the focus group’s discussion.
Looking finally at the US, we see here a relatively low
use of overdrafts, which interviewees indicated are
‘frowned upon’ and usually have ‘huge fees’. The low
take up of factoring was explained by its not being well
understood and being a comparatively cumbersome
alternative to a ‘line of credit’. The low usage of leasing
was interesting as this is ‘very easy to come by’,
because the leasing companies aggressively market
their product, and those leasing equipment are very
successful. The accountants stated that this has to be
balanced against the prevailing culture, in which it is
thought that one is better off buying than leasing as
one will get a better deal. Thus the advice they would
provide to clients in most cases would be to look at
buying outright and financing the purchase another
way, rather than leasing.
5.3 BANKS AS A SOURCE OF FINANCE
Respondents were asked if they had sought to raise
external finance in the last three years. As can be seen
from the first line of Table 5.5, only 22% of all
respondents had done so. For these, their bank was
either the main source in 53% of the cases, and one of
the sources used in 18% of cases, so overall banks
were actively involved in 71% of cases. Although there
are differences between the responses from the
different sizes of SME in the sample, these are not
statistically significant. It is, however, apparent from
Table 5.5 that SMEs with turnover in excess of £1
million are more likely to be successful in their
applications for finance. Table 5.5 also shows that in
the vast majority of cases (84%) the SME was wholly
successful, or partially successful (6%) in its attempts
to raise finance and that only in a small minority of
cases, 3% overall, was the failure to raise finance a
result of a refusal by the financier. In another 1% of
cases the SME decided not to accept the finance
offered. This may well have been on the basis that the
terms on which the finance was being offered were not
considered acceptable to the SME. These results in
terms of the relative success rates are mirrored by the
surveys of accountants in the UK and Hong Kong.
A country-based analysis of the sample, see Table 5.6,
shows that banks were most likely to be used as a
source of finance in Spain and least likely to be used in
the UK. The figures for the UK show a decline in the
use of bank finance from that reported by Lund and
Wright (1999). The corollary of the lower use of bank
finance is that the use of ‘other sources’ is much more
prevalent in the UK than elsewhere. The use of banks
as the main source of finance in Spain was attributed
by the accountants’ focus group to a lack of
sophistication and knowledge of alternative forms of
finance among SME owners and the high levels of
competition among banks. In Germany, the focus group
made a number of allusions to the predominance of
Banking relationships (continued)
PAGE 41
Table 5.6: Banks as a source of finance – country analysis
All UK Germany Spain Hong Kong US
% % % % % %
External finance sought
in last three years 22 17 19 28 22 24
From: Main bank 53 37 57 66 54 43
Other source 29 54 27 14 23 36
Both 18 9 16 20 23 21
Successful in full 84 89 81 87 80 92
Successful in part 6 9 3 9 5 2
Refused by financier(s) 3 0 5 4 7 0
Refused by SME 1 0 3 0 2 2
Did not know 5 2 8 0 6 4
Table 5.5: Banks as a source of finance – size analysis
50K 250K 500K 1m 5m 10m
All <50K –250K –500K –1m –5m –10m –25m
% % % % % % % %
External finance sought
in last three years 22 16 13 19 15 23 39 35
From: Main bank 53 50 39 58 63 62 56 42
Other source 29 33 43 35 25 31 18 28
Both 18 17 18 8 13 8 26 31
Successful in full 84 79 79 81 81 87 96 86
Successful in part 6 4 4 15 6 5 2 6
Refused by financier(s) 3 4 7 0 6 3 2 6
Refused by the SME 1 4 4 0 0 0 0 0
Did not know 5 8 7 4 6 5 0 3
Banking relationships (continued)
PAGE 42
engineers and technologists running SMEs and their
lack of financial understanding and sophistication.
It is worth noting that in the UK only 17% of SME
respondents to this survey indicated that they had tried
to raise finance in the last three years and there were
no cases reported where the finance was refused. This
17% compares with 44% in the Warwick survey
(Fraser 2004), which asked about a similar period of
time, and 18% in the Small Business Service (2006)
survey of 2004/5, which related to only a 12-month
period. The reasons for this may be explained by the
inclusion of start-ups in the SBS sample and the
relative bias of the sample data on which this report is
based towards small and medium-sized businesses
rather than micro businesses.6 These businesses are
likely to have been around longer and would therefore
be expected to have a more stable financial base than
start ups, which are more likely to be included, at least
initially, in the micro business category.
As was the case with the Warwick survey (Fraser
2004), the responses indicate that contrary to
expectations about finance gaps, in the vast majority of
cases in all countries the SMEs were successful in
raising the finance they wanted. Actual refusals related
to between 4% and 7% of cases in each country and in
only 2% of cases did this cause the SME significant
financial difficulties. In the other cases the SME either
raised the finance from another source or changed its
plans.
5.4 REASONS FOR REFUSAL OF FINANCE
The reasons why finance was refused were explored by
providing accountants in each of the countries with a
list of reasons for refusal:
• not enough equity in the business
• poorly presented business plan
• poor quality of management
• lack of security/collateral
• poor market feasibility
• other.
The main reason for refusal of finance, from the
accountants’ perspective in all countries except
Germany, was ‘a lack of collateral/security’ and this
was followed in most cases by a lack of equity. In some
countries, eg the US, the lack of security was offset, to
some extent, by real-estate booms. In Germany,
although lack of collateral was seen as an issue, the
primary issue was not enough equity in the business.
This is explained by the tax and regulatory regime,
which has encouraged the use of debt finance and
discouraged keeping equity in the business. This has
inevitably led to problems since the start of the present
century, when the period of expansion was over, as
there were also changes in what was seen by banks as
an ‘acceptable financing structure’. It is noticeable that
in all countries the more ‘business related’ reasons do
not cause many problems; the decision is financially
based and dominated by the collateral/security issue. In
Spain the focus group saw changes in policies and
provided interesting comments on the way in which the
system has operated and is changing.
Banking relationships (continued)
6 In line with the classification used by the Observatory of SMEs’ report (2004), micro businesses are defined as those having fewer than 10 employees, small businesses are those with 10 to 49 employees and those with 50 to 249 employees are defined as medium sized.
PAGE 43
Banks are not used to management information; they
look at buildings, warranty and then the financials …
not the business plans. But this is changing … for
young people they might use a business plan for a
start up … but the banks are not lending their money
… it is a public institution behind the bank that is
providing the money.
The first part of this comment is perhaps not surprising
when one considers the prevalence of multiple banking
relationships. In these cases, in contrast to a single
banking relationship where the bank can track the
business’s cash performance through the bank
accounts it holds, any individual bank will see only part
of the picture and as such management information
cannot be easily validated from their own records.
Interestingly, in all three countries where more in-depth
data collection was undertaken another theme that
emerged was refusals due to changes in banks’
strategies and policies. In the case of Germany, this
manifested itself in new policies regarding equity in the
business, while in Spain and the US it was related to
banks’ decisions to get out of an industry sector or size-
related sector of the business market.
The sectors that seemed to be experiencing difficulties
in raising finance varied from country to country. In the
UK, accountants’ responses indicated no general
pattern; instead there were mentions of a wide variety
of sectors, including manufacturing, construction,
technology-based, retailing, hospitality and catering-
related industries. In Spain, Germany and the US,
construction is a difficult area to finance and
respondents in the US also mentioned restaurants as
an area of business that is problematic, although it was
accepted that this is a sector with a high failure rate.
At a more general level, in every country the
accountants identified start-ups as a significant
problem area for raising finance. The reasons for this
were lack of track record, together with an over reliance
by banks on collateral and security as a prerequisite for
granting credit. In the US there are particular schemes
to help ethnic minority and female owners to start
businesses, while in Germany the main ethnic minority
community, ie Turkish, have their own banks. In Spain,
as can be seen from the quote above, the banks are
used as agents in providing public money for start ups.
5.5 BANKING RELATIONSHIPS – COMMUNICATION
Communication was looked at from the point of view of
whether the SME has a dedicated official or not and
how the SME communicates with its bank. Broadly, the
results show that the vast majority of SMEs have a
dedicated manager or official of their bank allocated to
them (over 90% in all countries except the US, which
has 70%). It is also clear that the larger the SME the
more likely it is that it will have a dedicated official
dealing with it.
Similarly, as one might expect, the ways in which SMEs
deal with their banks is affected by size, with 74% of
the smallest SMEs visiting their banks while only 34%
of the largest businesses use this method of
communication. On the other measures, ie telephone,
writing and electronic communication, essentially the
larger the business the more likely it is to use these
forms of communication. In the case of writing, 20% of
micro businesses use this form of communication
compared with 54% of the largest SMEs. For electronic
communication the percentages are 48% and 86%
respectively. Although differences did arise by country,
see Fig. 5.2 on page 42, it would appear at first sight
that size is the dominant factor affecting how SMEs
communicate with their banks. It is worth noting,
however, that in those countries with a tradition of local
or regional banks, ie the US, Germany and Spain,
visiting the banks is noticeably higher rated. This would
accord, in the US, with the results of the NFIB Small
Business Poll (2005), which shows that convenient
location and knowledge of the local and regional
market are among the top characteristics small
business owners look for in their banks.
Banking relationships (continued)
PAGE 44
Visit branch
Telephone
Online
Write
Figure 5.2: SMEs communications with banks
UK Germany Spain Hong Kong US
100
90
80
70
60
50
40
30
20
10
0
%
5.6 BANKING RELATIONSHIPS – SATISFACTION
WITH BANKS AND PROPENSITY TO CHANGE
Table 5.7 provides the results on eight measures of
satisfaction with the service provided by the SME’s
main bank. The respondents were asked to score their
bank on a 1 to 5 Likert scale from very dissatisfied (1)
to very satisfied (5). The overall satisfaction score has
been computed by a simple aggregation of all the other
scores. The data have been ordered in descending
order of satisfaction based on the results of the sample
as a whole. The first point to note is that the overall
level of satisfaction is 3.8 on a 5-point scale, indicating
a reasonably high level of satisfaction. As can be seen
in Table 5.7, these overall levels of satisfaction vary
slightly with size, with the very small, less than
£50,000 turnover, and the larger businesses, more
than £1,000,000 turnover, generally being more
satisfied. In the case of satisfaction with their main
contact and the competence of staff, the high scores
from the larger SMEs would accord with the results
referred to in section 5.5 above, which show that these
businesses are most likely to have a named or
dedicated official dealing with them.
Banking relationships (continued)
PAGE 45
Interestingly, respondent SMEs in the £50,000 to
£1,000,000 and, in particular, in the £250,000 to
£1,000,000 ranges are less satisfied than the others
on virtually every measure, although why this should
be the case is not immediately apparent.
The interviewees in the US suggested that this was
because the banks are more interested in the larger
businesses and that this ‘middle’ group suffers from
having an increasingly sophisticated banking service
requirement which it is not profitable for banks to
provide. This has led to a situation in which some
banks openly discourage this size of business customer
because of the difficulty of making a reasonable return.
It is worth noting the specific areas where SMEs are
less satisfied. The first of these is concerned with the
perception of the banks’ understanding of the business.
On this measure, the banks’ perceived performance
seems to be better the larger the business. The second
area of relatively low scoring is that concerned with
charges and tariffs, where the mean scores are
considerably lower than on all the other measures. It
should be borne in mind, however, that the score is
above the median score of 2.5, which indicates that
the SMEs are generally satisfied rather than dissatisfied
with this aspect of their banks’ service. Each of these
areas is discussed in more detail in the country-based
analysis below.
50K 250K 500K 1m 5m 10m
All <50K –250K –500K –1m –5m –10m –25m
% % % % % % % %
Mean score on a 1 to 5 satisfaction scale
Main contact 4.0 4.2 4.1 3.9 3.9 4.2 4.1 4.1
Availability of finance 3.9 3.9 3.7 3.7 3.7 4.0 4.1 4.0
The range of services offered 3.9 4.1 3.9 3.7 3.8 4.0 4.1 3.9
The competence of staff 3.9 4.1 4.0 3.7 3.8 4.0 4.0 4.1
The speed and efficiency
of service 3.9 3.9 3.9 3.7 3.8 3.9 4.0 4.0
The overall quality of service 3.9 4.1 3.9 3.7 3.8 4.0 3.9 4.0
How well they understand
your business 3.7 3.7 3.6 3.6 3.7 3.8 3.9 3.9
Charges or tariffs 3.2 3.3 3.1 3.0 2.9 3.4 3.2 3.4
Aggregated satisfaction
score 3.8 3.9 3.8 3.6 3.7 3.9 3.9 3.9
Table 5.7: Satisfaction with bank measured by SME turnover
Banking relationships (continued)
PAGE 46
An analysis by country, see Table 5.8, shows that UK
banks are comparable to their counterparts in the other
countries on the aggregate measure and also on six of
the eight measures of satisfaction, where the UK mean
score is the same as the overall mean for the total
population.7 Despite the finding reported in section 5.3
above, that UK SMEs are less likely to have used their
bank as a source of finance, the level of satisfaction
with the availability of finance is equal to that in Spain,
where banks are most likely to be used as a source of
finance.
The two measures on which the UK banks are rated
below the average are the level of understanding of the
SME’s business, and satisfaction with charges and
tariffs. The lack of understanding is a classic example
of information asymmetry, where the SME and the
SME’s accountant know more about the business than
the bank and believe that the bank would be able to
make more informed and better decisions if it really
understood the business. On this item, for the UK
banks the rating is slightly above that of Hong Kong
although, as noted in footnote 7, Hong Kong
consistently has lower scores than the other countries.
For satisfaction with charges and tariffs, the UK SMEs
score their banks higher than their counterparts in
Germany but lower than SMEs in any of the other
countries.
Table 5.8: Satisfaction with bank measured against country of SME
All UK Germany Spain Hong Kong US
Mean score on a 1 to 5 satisfaction scale
Overall quality of service 4.0 4.0 4.0 4.3 3.7 4.4
Availability of finance 3.9 3.9 3.7 3.9 3.6 4.2
Range of services offered 3.9 3.9 3.7 4.0 3.7 4.3
Competence of staff 3.9 3.9 3.8 4.0 3.7 4.3
Speed and efficiency of service 3.9 3.9 3.8 3.9 3.7 4.3
Main contact 3.9 3.9 3.8 4.0 3.8 4.3
Level of understanding of your business 3.7 3.6 3.7 4.0 3.5 3.9
Charges or tarriffs 3.2 3.0 2.9 3.2 3.1 3.8
Overall 3.8 3.8 3.7 3.9 3.6 4.2
7 On questions where respondents were asked to rank satisfaction on a 1 to 5 scale, respondents from Hong Kong scored satisfaction consistently below the average while those from the US scored consistently higher than the average. Whether this reflects the SMEs’ experience with their banks and accountants or is a national trait in satisfaction rating is unclear.
Banking relationships (continued)
PAGE 47
In general, the accountants were more critical of banks
than the SMEs. From the perspective of accountants in
the UK and Hong Kong, by far the lowest scores are for
satisfaction with banks’ tariffs and charges.
Accountants were also more critical about the level of
understanding of their clients’ businesses, the speed
and efficiency of service and the competence of staff. In
the US, the accountants interviewed were generally
satisfied with the charges and tariffs but were very
critical of the bank staffs’ level of understanding of the
business and their competence. The reasons for this
were varied but some were common across the two
countries; on education and understanding, the
comments from accountants in both countries reveal a
picture of competent managers supported by poorly
trained staff, with SMEs experiencing difficulties getting
to the manager. Other common issues related to the
organisational structure of banks where those making
the credit decision are separated from the relationship
manager, causing mixed messages and delaying
decisions. There were comments about the base level
of understanding of what a business does and about
the increased sales culture within banks, causing
bankers to become sales oriented. In the UK, another
issue raised, especially for the smaller SMEs, was the
difficulty in communications caused by inability to get
beyond the call centre to talk to someone who could
deal with the business sensibly.
As we have already mentioned, in Germany the
changing structures and policies of banks are causing a
level of dissatisfaction. In Spain, however, although the
accountants were satisfied with the availability of
finance and the charges and tariffs, questions were
raised about the competence of staff and their general
business-related expertise, and about the speed of
service, with more loan requests being pushed to a
centralised office that might take ‘up to a month to
make a decision on a large loan’.
5.7 PROPENSITY TO CHANGE BANKER
The analysis shows that the customer’s propensity to
change banks is not a function of the size of the
business, but it is affected by the country in which the
SME is based. The respondents here split between
continental Europe, ie Spain and Germany, where 40%
and 34% respectively said they would consider
changing if approached by another bank, and the UK,
US and Hong Kong, where approximately 20% would
consider changing. The reasons for these differences
may relate to the number of banking relationships the
SMEs have in Spain and Germany, see Table 5.2 on
page 35, as well as their levels of satisfaction with their
banks as shown in Table 5.8. A further factor identified
by the German focus group is the changes in banks’
policy following reunification, which have caused SMEs
to have to change banks. In the case of Spain, the
focus group suggested that the high level of competition
is a significant issue in causing SMEs to work with
multiple banks and this could also be an explanatory
factor for the high propensity to change. The results for
Spain accord with Cardone et al. (2005) who point to
relatively short banking relationships.8
8 See Chapter 2, section 2.3, subsection on ‘Banking and SMEs – other factors’, page 14 for details.
Banking relationships (continued)
PAGE 48
Figure 5.4: Current account benefits – analysis by country
%
60
50
40
30
20
10
0 Interest Free Interest and none of
transactions free transactions these
UK
Germany
Spain
Hong Kong
US
Figure 5.3: Current account benefits – analysis by size
%
60
50
40
30
20
10
0 Interest Free Interest and none of No current
transactions free transactions these account
<50k
50k–250k
250k–500k
500k–1m
1m–5m
5m–10m
10m–25m
Banking relationships (continued)
PAGE 49
5.8 BANKING RELATIONSHIPS – CURRENT
ACCOUNT BENEFITS
An analysis of the benefits that the SMEs in the sample
received from their current accounts, based upon size
(see Fig. 5.3) shows an uneven pattern of benefits, with
the very small businesses generally being the group most
likely to have no benefits; 39% receiving no benefits
compared with 19% for the larger SMEs, and an overall
average of 28%.
A country-based analysis, Fig. 5.4, shows that the
pattern of benefits is more likely to be affected by the
particular norms within the country concerned. Fig. 5.4
shows that for current accounts, SMEs in Spain and
Hong Kong are least likely to receive no benefits while
SMEs in the UK are most likely to receive no benefits.
Looking at the types of benefit offered, more SMEs in the
UK and Germany receive interest while free transactions
are more prevalent in the samples from Hong Kong and
the US. It is worth noting that Fraser (2004) shows that
34% of SMEs in the UK receive free banking and 56%
receive interest. SMEs in Spain receive the greatest
benefits on their current accounts, with only 20% getting
no benefits and a greater proportion getting both interest
and free transactions than was the case in any other
country. It should be borne in mind, however, that
although the data show that these SMEs receive some
interest and some free transactions, they do not show the
rate of interest or the number of free transactions or the
conditions attached to those free transactions. As such,
the comparisons may provide only a partial picture.
Banking relationships (continued)
PAGE 51
Two questions were asked relating to this topic. The
first was an open-ended question: ‘What would you
consider to be the biggest challenges facing your
business?’ The second question required respondents to
score a predetermined randomised set of business
issues on a 1 to 10 Likert scale, with 10 indicating the
issue had the highest importance and 1 the lowest
importance.
6.1 RESPONSES TO THE OPEN-ENDED QUESTION
On the open-ended question the responses were wide
ranging. Table 6.1 provides an overview and an
analysis by size, of all issues raised by 4% or more of
the total respondents. Starting with the overall analysis
we can see that increased competition is the most cited
issue, being cited by 20% of the sample. The next most
frequently cited area is getting new business. As might
be expected, given the responses in the previous
chapter showing that only 22% of the sample had tried
to raise finance in the last three years and that 90% of
those were successful, issues relating to finance are not
as frequently cited as competition and increasing sales.
Nonetheless, the fact that it is the third most frequently
cited issue may reflect the fact that this category brings
together matters relating to finance, working capital
management, cash flows, etc, rather than just access
to finance.
Looking at the effects of size, competition was a more
important issue for the larger SMEs, although it is also
worth noting that a country-based analysis, see Table 6.2,
6. Challenges faced by SMEs
50K 250K 500K 1m 5m 10m
All <50K –250K –500K –1m –5m –10m –25m
Issue % % % % % % % %
Increased competition especially foreign 20 18 11 15 20 19 20 26
Getting new business 16 14 20 14 19 14 17 9
Finances and cash flow 10 10 10 9 8 10 11 8
Getting work/ staying in business/ surviving 9 6 12 11 6 9 6 9
Pricing and price competition 7 2 7 7 5 5 10 15
Costs 6 3 7 4 5 8 8 9
Economic conditions 6 8 7 8 4 4 4 4
Declining sales/demand 5 3 6 6 5 4 7 5
Changing markets 5 5 7 3 1 4 12 5
Slow paying customers 5 8 6 5 7 5 3 2
Finding qualified staff 5 4 5 1 7 7 4 3
Regulation/ red tape 4 1 3 5 3 4 6 3
Table 6.1: Biggest challenge faced by businesses – size analysis
PAGE 52
shows that this is more of an issue for SMEs based in
Spain and Hong Kong. Pricing and price competition
together with cost-related issues are also more often
seen as an issue for larger SMEs, ie those with turnover
in excess of £1 million. Similarly, 6% of the largest
businesses identified exchange rates as an issue
although this was cited by only 2% of all the SMEs
surveyed and is therefore excluded from the tables.
Virtually all those raising this as an issue came from
the UK and Hong Kong. This is hardly surprising given
the size of the Eurozone and Dollar markets. At the
other end of the size spectrum, slow-paying customers
are more of an issue for smaller businesses, being cited
by 8% of the smallest class of SMEs compared with
only 2% of the largest. The country-based analysis
indicates that this is, however, a particular issue for
German SMEs. Economic conditions seemed to be of
more concern to smaller SMEs and to those from
countries other than the UK and Spain.
Looking at the country-based analysis in Hong Kong, in
both the accountants’ survey and the SME survey, the
highest scoring issue is competition. This may be
related to the fact that over 50% of the sample is
involved in international markets as well as to the
impact of competition from China. The reasons for the
high scoring by SMEs in Spain is not so clear from the
data, as there was less involvement in international
markets at only 29% (see Table 4.3 on page 27 for
details of markets). As the first and second issues, ie
competition and getting new business, are related, it is
likely that there is some substitution effect between
Table 6.2: Biggest challenge faced by businesses – country analysis
All UK Germany Spain Hong Kong US
% % % % % %
Increased competition especially foreign 20 15 9 32 31 14
Getting new business 16 14 21 22 5 17
Finances and cash flow 10 9 11 6 9 14
Getting work/ staying in business/ surviving 9 11 14 10 0 9
Pricing and price competition 7 7 11 6 7 6
Costs 6 5 6 4 6 9
Economic conditions 6 3 9 2 8 8
Declining sales/demand 5 10 6 2 2 6
Changing markets 5 5 4 5 5 7
Slow paying customers 5 5 10 3 4 4
Finding qualified staff 5 2 2 8 2 10
Regulation/ red tape 4 8 5 2 1 1
Challenges faced by SMEs (continued)
PAGE 53
these categories. If the citation scores are combined we
see that these appear to be more of an issue in Spain
than other countries. The accountants’ focus group
suggested that Spain is no longer a low-wage economy
but also ‘[does] not add a lot of value’ during the
production process and as such it is facing increased
competition from low-wage economies such as China
and the accession states, Poland in particular, as a
result of the EU enlargement. UK SMEs are more
concerned with declining sales/demand than others.
Once again there may be an element of substitution
here, with increased competition causing the decline in
sales rather than a declining market demand as a whole.
On the more general finance-related issues it is worth
noting that 14% of the respondents from the US cited
this as an issue compared with only 6% from Spain.
The interviews with accountants in the US suggest that
this is more likely to relate to cash flows as there are
problems in raising working capital finance for
inventory, and cash flow problems are exacerbated by
very slow payment from state and government. The
issue of slow payment is a particular issue for German
SMEs. The German focus group put this down to the
dominance of engineers and technologists at the head
of small businesses and their lack of understanding of
the need to collect cash and manage the financial side
of the business. The other reason they put forward was
that it may well reflect a preponderance of public sector
customers, as the public sector was a very slow payer.
Further analysis of the total data set shows that 6% of
German SMEs and 5% of Hong Kong SMEs cite poor
support from their banks as the biggest issue facing
their business, compared with about 2.5% in the UK
and the US and 1% of the sample from Spain. The
problem of finding qualified staff seems to affect SMEs
in the US more than elsewhere. This was explored in
depth during the interviews with accountants in the
US. They were quite clear that this is in fact the case
for their clients, as one interviewee remarked: ‘Staffing
is the nightmare of all nightmares in 95% of SMEs; it is
especially bad in construction industries where you
cannot get supervisors or foremen’.
He went on to argue that in some cases this was
putting a brake on expansion. The reasons put forward
for this related to the relative riskiness of jobs in small
versus large businesses, the lower level of benefits,
flexibility and the unrealistically high expectations of
graduates and others entering industry.
Finally, it is worth noting that a substantially larger
percentage of the sample of UK and German-based
SMEs raised the issue of regulation compared with
respondents from the other countries. This was borne
out by the accountants’ survey, where this was cited as
an issue by 42% of UK accountants compared with
only 19% of the Hong Kong respondents. The focus
group from Germany confirmed that Germany is ‘very
regulated’, resulting in a greater than average use of
lawyers for advice. This is an area that will be revisited
in Chapter 7 of this report.
6.2 THE STRUCTURED QUESTION
Turning now to the structured questions on business
issues, where the respondents were asked to score
each issue on a 1 to 10 score from least important to
very important, Table 6.3 shows the results on this
question, ranked and then analysed by size. Some
points worthy of note are the high weighting of future
planning and the low weighting of finance-related
matters and access to business advice. The results on
finance can be compared with those from the
Observatory of European SMEs’ report (2004), where
around 30% of respondents raised ‘lack of purchasing
power of customers’ as a constraint. This can be
equated with the high ranking of achieving enough
sales and access to new markets. Similarly the trend
found in the Observatory report (2004), which showed
that the larger the business the more important was the
Challenges faced by SMEs (continued)
PAGE 54
issue of skilled labour, is broadly mirrored in the results
from this survey, although as noted above in the US it
is an issue for smaller SMEs. Finally, in relation to
access to finance, the Observatory report (2004)
identified this as more of an issue for the businesses in
the middle of the size spectrum, and the results in
Table 6.3, together with the discussions with
accountants, support that finding.
For the country-based analysis, Table 6.4 provides both
a ranking and score by country. This enables the reader
to see the relative importance of the issues in each
country and compare these without being affected by
the issues relating to high and low scoring in the US
and Hong Kong referred to earlier (see footnote 7 on
page 44). The country-based analysis of the responses
shows some slight variations, with Germany and Spain
ranking employee-related issues higher than the other
countries. As might be expected from the responses to
the open ended questions discussed above, issues
relating to sales, markets and competition received a
higher importance ranking from the respondents from
Hong Kong. Of particular interest in terms of SME
banking relationships are the rankings of the cost of
finance. This was ranked lowest by SMEs from the UK.
In terms of access to finance it is worth noting that of
Table 6.3: Importance of business issues – analysed by size
50K 250K 500K 1m 5m 10m
All <50K –250K –500K –1m –5m –10m –25m
% % % % % % % %
Achieving enough sales 8.0 7.6 7.9 8.1 8.1 8.1 8.2 8.4
Planning for the future of the business 7.8 7.3 7.8 7.8 7.8 7.9 8.0 8.0
Finding and retaining skilled employees 7.3 6.4 6.7 7.6 7.5 7.7 7.9 7.6
Access to new markets 6.7 6.2 6.5 6.4 7.1 6.8 7.2 7.2
Competition from other firms 6.9 6.2 6.2 7.0 7.5 7.1 7.4 7.6
The cost of employees 6.9 6.1 6.5 6.9 7.4 7.4 7.2 7.2
Government or other regulation or red tape 6.2 5.9 6.4 6.2 6.3 6.1 6.0 6.5
The cost of finance 6.1 5.8 6.1 6.3 6.6 6.0 6.3 5.7
Access to finance 6.1 5.7 5.9 6.1 6.5 6.4 6.2 6.2
A lack of business support or advice 5.5 5.4 5.6 5.5 5.8 5.3 5.2 5.6
The cost of or finding suitable premises 4.8 4.6 4.6 4.7 5.1 4.9 4.9 4.8
n= 1004 147 212 140 106 168 129 102
Challenges faced by SMEs (continued)
PAGE 55
those respondents in the UK who accessed finance,
only a minority, 37%, obtained this from their bank
(see Table 5.6 on page 39). Thus the relatively low
ranking of cost and access may reflect cheaper finance
from sources other than the respondents’ banks. On the
ever-topical issue of regulation and red tape, mean
scores for the UK and Hong Kong gave this a ranking of
sixth in importance. The US, Germany and Spain each
ranked it lower, at seventh, eighth and ninth place
respectively. This higher ranking from the UK
respondents confirms the findings from the open-ended
question discussed earlier and is confirmed by the
accountants’ survey.
Challenges faced by SMEs (continued)
Table 6.4: Importance of business issues – analysed by country
All UK Germany Spain Hong Kong USA
Rank Mean Rank Mean Rank Mean Rank Mean Rank Mean Rank Mean
Achieving enough sales 1 8.0 1 8.2 2 7.8 1 8.6 1 7.4 1 8.2
Planning for the future of the business 2 7.8 2 7.5 1 8.0 3 8.1 3 7.3 2 8.1
Finding and retaining skilled employees 3 7.3 3 6.7 3 7.6 2 8.3 5 6.9 3 7.0
The cost of employees 4 6.9 4 6.5 4 7.4 5 7.3 6 6.7 6 6.6
Competition from other firms 5 6.9 5 6.4 6 6.6 4 7.4 1 7.4 5 6.8
Access to new markets 6 6.7 6 6.0 5 6.7 6 6.9 4 7.1 4 6.9
Government or other regulation or red tape 7 6.2 6 6.0 8 5.9 9 6.3 6 6.7 7 6.1
The cost of finance 8 6.1 9 5.6 7 6.1 7 6.8 8 6.3 9 5.7
Access to finance 9 6.1 8 5.7 8 5.9 8 6.7 8 6.3 8 6.0
A lack of business support or advice 10 5.5 10 5.0 10 5.0 9 6.3 10 6.1 10 5.1
The cost of or finding suitable premises 11 4.8 11 4.6 11 3.4 11 5.7 11 5.8 11 4.2
PAGE 57
7.1 WHO ADVISES SMES?
The fact that a lack of business advice has a relatively
low importance rating, tenth of the 11 issues on
which respondents were asked a direct question, and
the fact that there is no variation in ranking from
country to country (see Tables 6.3 and 6.4) would
suggest that either the SMEs do not think they need
advice or they are satisfied with the level of advice to
which they have access. The answer may in fact be a
combination of these two factors, as the responses
shown in the top line of Table 7.1 show that just over
half the SMEs questioned sought external advice.
More interestingly, the data in the top line of Table 7.1
show that the propensity to seek external advice is
affected by size, with 43% of the smallest firms
seeking advice and the percentage steadily rising
through the size bands to reach a level of 75% of the
largest firms.
Turning to the advisers used, some interesting facts
emerge. The more obvious ones are the high ranking
of accountants, solicitors and banks as sources of
advice. The bigger the firm, the more likely it is to use
these three sources of advice. Interestingly, but
perhaps unsurprisingly, the ranking of family or friends
shows exactly the opposite trend, ie they decrease in
relative importance and use as the business gets
bigger. As regards the government and public
agencies, the pattern here is very mixed with only
25% of the smallest SMEs that ask for advice using
this source. If one takes account of the fact that only
43% of these businesses seek advice at all this
amounts to about 10% of the total sample of SMEs of
this size.
7. Advice and the role of external accountants
50K 250K 500K 1m 5m 10m Overall £ <50K –250K –500K –1m –5m –10m –25m
Business seeks external advice 53% 43% 47% 49% 49% 55% 65% 75%
Source of advice % Rank % Rank % Rank % Rank % Rank % Rank % Rank % Rank
Accountants 79 1 75 1 78 1 81 1 73 1 87 1 76 2 82 2
Solicitors 76 2 64 2 61 4 79 2 72 2 82 2 85 1 91 1
Banks or financial institutions 66 3 57 3 63 2 62 3 52 4 70 3 68 3 82 3
Business colleagues 60 4 46 5 62 3 53 4 65 3 62 4 66 4 62 4
General business advisers 42 5 41 6 44 7 34 7 44 5 43 6 43 5 45 5
Friends or family 42 6 48 4 50 5 44 5 44 5 46 5 36 7 24 7
Government or public agencies 38 7 25 7 46 6 42 6 27 7 40 7 39 6 40 6
n= 535 63 99 68 52 93 84 76
Table 7.1: Propensity to seek advice and advisers used – size analysis
PAGE 58
The other factor that affects the propensity to seek
external advice is the country in which the SME is
based. The first line of Table 7.2 shows that there are
variations, from 37% of firms in the Hong Kong sample
up to 66% in Spain, with the UK sitting close to the
overall average of 53%.
The country analysis shows some changes in the
ordering of accountants, solicitors and banks between
countries. In the case of Germany and Spain, the
different rankings of lawyers and accountants may
result from the differing roles and structures of the
professions in those countries. In Germany, the
accounting profession is essentially divided into
auditors and tax advisers/accountants. In addition,
many lawyers also undertake the tax adviser role and
the focus group suggested that this may have caused
some confusion among the SME respondents. This,
when combined with the comments that Germany is a
relatively regulated environment, would provide a clear
explanation for the difference. In Spain, a similar
picture emerges from the focus group; it was explained
that the lawyers’ function covers advice on tax,
personnel-related matters and payroll-related issues. In
the US, the low ranking of lawyers was explored further
with interviewees and the responses indicate that it
could be part of a general view prevalent in the US that
lawyers are there to look after their own business, not
their client’s.
Perhaps the most interesting finding to emerge from a
country–by-country analysis of the advisers is that,
Table 7.2: Propensity to seek advice and advisors used – country analysis
UK Germany Spain Hong Kong US
Business seeks external advice 54% 61% 66% 37% 49%
Source of advice % Rank % Rank % Rank % Rank % Rank
Accountants 91.7 1 71.9 2 70.7 2 77.0 1 87.8 1
Solicitors 79.8 2 72.7 1 82.7 1 74.3 2 68.4 4
Banks or financial institutions 69.7 3 61.2 4 60.9 3 73.0 3 69.4 3
Business colleagues 68.8 4 70.2 3 29.3 6 51.4 4 84.7 2
General business advisers 40.4 6 33.1 7 53.4 4 40.5 5 41.8 6
Friends or family 38.5 7 56.2 5 24.1 7 36.5 6 55.1 5
Government or public agencies 51.4 5 39.7 6 34.6 5 31.1 7 30.6 7
n= 109 121 133 74 98
Advice and the role of external accountants (continued)
PAGE 59
based upon a ranking of the mean scores, SMEs in the
US rank business colleagues as the second most
frequently used source of advice whereas this is almost
the lowest ranked source of advice in Spain. When
these rankings were explored, the view from the
Spanish focus group was that this was to do with
competition while in the US the view was that taking
advice from business colleagues who may have faced
and solved the same or similar problems is so obviously
sensible that it is done all the time. In Germany, where
business colleagues and friends and family are also
highly ranked, this was seen as entirely consistent with
a long tradition of family-owned business, the
Mittelstand.
The low ranking of government agencies in the US and
Hong Kong is also of interest and raises questions
about whether this reflects the impact of those agencies
or the extent of activity in those countries. In the US,
the general view from the interviewees was that the low
take up was primarily an issue of trust but that there
were other factors at play as illustrated by the following
quote.
People don’t trust government – if you are in
government you’re not in business – they’re not the
crème de la crème and would not survive in business
– they change the rules – ask for more and more
information so people don’t work with them – they
follow rules not logic – they are not in a hurry – their
money is not on the line.
On the other hand, the high level of use of family and
friends in Germany and the US was explained partially
by the issue of trust but also, and more importantly, in
both countries the respondents argued that there was a
long tradition of family-owned businesses that enabled
current entrepreneurs to draw upon a wealth of relevant
experience in their own family circle.
7.2 THE EXTERNAL ACCOUNTANT AS AN ADVISER
– SERVICES OFFERED
It is worth noting that the majority of the SMEs
surveyed (62%) had someone with a professional
financial qualification in charge of running the financial
side of their business. This percentage ranged from
43% in the smallest firms to 92% in the largest.
Table 7.3 on page 58 provides details of those
accountants’ services that respondents said they use.
As might be expected, the smaller the firm the less
likely it is to use all the services that accountants might
offer. There are also some interesting patterns that
might indicate that once firms reach a turnover of
around £1 million they become less reliant on the
external accountant. This may be because they have in-
house financial expertise. As can be seen in Table 7.3,
the role that accountants play is still the traditional one
of accounts preparation, tax and audit, although with
larger firms it is clear that there is also greater
involvement in planning, advice and consultancy.
The results in relation to the involvement in preparation
of accounts would appear, at first sight, to be at odds
with the idea that larger firms have internal expertise.
The increasing complexity of the regulations and the
number of standards with which financial accounts
have to comply may, however, provide an explanation
for this. Given the easing of the audit requirement for
SMEs in Europe, the percentage of firms that still have
their accounts audited is higher than might be
expected. This may partially reflect the structure of the
respondent firms, which have a bias toward larger
SMEs. It may also be connected with the need for firms
to produce financial accounts to comply with standards
and regulation. It is worth noting that the questionnaire
contained a check question on this, which confirmed
the responses in respect of whether firms have their
accounts audited. This apparent anomaly is discussed
in more detail below.
Advice and the role of external accountants (continued)
PAGE 60
One of the more interesting results in Table 7.3 is the
relatively low use of external accountants for access to
finance and investment advice. It has to be borne in
mind, however, that only 22% of the sample said they
had tried to raise finance in the last three years so it
may be that the results here reflect that low demand for
finance and a corresponding low requirement for advice
on how to access finance.
A country-based analysis of the data is shown in Table
7.4. The data on audit, tax and preparation of accounts
need to be treated with caution, however, and read in
the light of the differences between the accounting
professions and their roles highlighted in Chapter 3 of
this report. It is worth reiterating some of the issues
from that chapter, and from our discussions in the
focus groups and interviews, to shed some light upon
the figures.
In Germany, where small firms are exempt from audit,
the focus group was clear that when firms grow the
banks demand audited accounts. The group’s members
were equally clear that many bankers do not know the
difference between ‘an audited set of accounts and
prepared accounts as both are signed’. Similarly, in
Spain the group argued that banks are increasingly
demanding audited accounts as they ‘do not trust the
financial accounts any more’. In the US, interviewees
again claimed that banks are asking for audited
accounts. Interestingly, the other big demand for
audited information comes from public bodies, which
will not appoint suppliers without prior provision of
audited accounts. A common theme among the focus
groups and interviewees was the relatively low level of
financial sophistication among their SME clients and
often also among their bankers. Add to this the various
levels of reports in the US and Germany and it would
Table 7.3: External accountants – analysis of services used, by size
50K 250K 500K 1m 5m 10m
Overall £ <50K –250K –500K –1m –5m –10m –25m
% % % % % % % %
Tax planning and advice 84 74 81 94 84 86 85 83
Audit 76 59 73 79 76 82 82 87
Preparing accounts 70 56 73 84 76 68 67 64
Business planning 38 32 34 44 34 34 39 53
Access to finance and investment advice 38 27 38 41 37 39 46 42
General business advice 37 27 34 44 39 37 33 52
Management consultancy 35 27 33 36 33 35 40 46
Accounts audited 88 71 86 89 95 91 95 97
Advice and the role of external accountants (continued)
PAGE 61
not be unreasonable to suggest that perhaps the high
response on audit masks a misunderstanding of the
term rather than a reliable figure.
Moving away from the financially related services, an
interesting finding here is the apparent use of
accountants, by over 60% of Spanish SMEs, as a
source of management consultancy, compared with the
relatively low use of this service by UK SMEs. Members
of the focus group in Spain were sceptical of this figure,
however, suggesting it was probably due to a
misunderstanding of the term by the participants in the
SME survey.
It is also worth noting, given the high ranking of
planning identified in Tables 6.3 and 6.4, that this is
an activity where only a minority of SMEs involve their
external accountants.
From a UK accountant’s perspective, the results show
that accountants are used less for non-traditional
services by the SMEs in the sample than they are in
other countries in the sample, apart from Germany. In
Germany, the result showing relatively low use under
this heading was confirmed by the focus group, which
suggested that the current focus is on tax work only.
Members also indicated that this work will be under
threat in the future because of the increasing
availability of tax-related software and that this would
force accountants to provide a broader range of
services although, given their other remarks about
expertise and competence of the tax advisers on areas
beyond tax advice, there would appear to be some
doubt as to whether all sections of the profession are
ready and adequately equipped to undertake a broader
remit.
Table 7.4: External accountants – analysis of services used, by country
All UK Germany Spain Hong Kong US
% % % % % %
Tax planning and advice 84 86 84 83 79 86
Audit 76 88 63 66 93 73
Preparing accounts 70 73 90 67 69 51
Business planning 38 34 32 41 41 41
Access to finance and investment advice 38 34 33 41 41 43
General business advice 37 42 33 38 30 42
Management consultancy 35 22 26 62 34 31
n = 958 200 188 189 196 185
Advice and the role of external accountants (continued)
PAGE 62
7.3 THE EXTERNAL ACCOUNTANT’S ROLE IN
FINANCIAL DECISIONS AND NEGOTIATIONS
Although only 38% of respondents identified advice on
finance and investment as one of the services for which
they used their accountant (see Table 7.4), when asked
the direct question ‘Does your accountant advise you
on the type of finance you should raise or that is best
suited to your business?’, 49% said that they did get
this advice and 40% said they did not (see Table 7.5).
Table 7.5 also shows that, of those accountants who
did advise on finance, only 70% took an active role.
This represents 34% of the total sample.
The inter-country analysis in Table 7.5 shows that, for
SMEs, obtaining their external accountant’s advice on
finance is most prevalent in Spain, at 67%, and least
prevalent in the UK at 36%. In the UK it is also
interesting to note that, even for those SMEs that do
involve their accountants in advising on financing
decisions, the accountant takes an active role in
negotiating finance in fewer than half the cases.
Once again these results need to be put into the context
of the various distinctions between the role of the
auditor and that of the tax adviser or accountant
compiling accounts for tax or statutory purposes. An
accountant who acts as an auditor would, in most
countries, be precluded from offering advice on finance
or taking any part in the decision-making process. The
interviewees in the US also offered an interesting
insight into their role by saying that they are virtually
always involved in raising finance in some way. This
can be because the client comes to the accountant for
advice first, or the client goes to the bank first and then
comes to the accountant because the bank wants some
All UK Germany Spain Hong Kong US
Advice on finance % % % % % %
Yes 49 36 52 67 47 43
No 40 49 38 28 40 44
Do not need 11 15 10 5 13 13
n= 958 200 188 189 196 185
Active role
n= 328 32 67 105 83 41
Percentage of those who advise 70% 44% 69% 83% 90% 52%
Percentage of total sample 34% 16% 36% 56% 42% 22%
Table 7.5: Accountant’s advice on finance and involvement in negotiations – country-based analysis
Advice and the role of external accountants (continued)
PAGE 63
further information, or the bank comes to the
accountant to obtain an interpretation of the
information provided. So, at one level they are
providing an interpretation service between the
business owners and the financiers. In Germany, on the
other hand, the focus group members were sceptical
about the knowledge, abilities and competence of tax
advisers in relation to business finances, even going so
far as to say that they are implicated in the fact that
German companies are dramatically under-capitalised
in terms of equity. The implication is that the advice
given is based upon maximising taxation benefit rather
than on sound economic principles of business finance.
They did, however, state that part of the current role of
the tax adviser and accountant is to provide a
communication and interpretation channel between the
SME owner and the bank, and vice versa.
An analysis of the data by size of SME shows a general
trend towards an increasing use of accountants in
negotiating finance as the size of the SME increases.
A final question relating to the SMEs’ satisfaction with
their accountants, from not at all satisfied (1) to very
satisfied (5) produced the responses shown in Table
7.6. Overall, SMEs are satisfied with the services and
advice their accountants offer. A country-based analysis
shows Hong Kong scoring lower on this and the US
scoring higher. As mentioned in footnote 7 (see page
44), however, this type of result applied to all questions
on which respondents were asked to rank their answers
on satisfaction scales and may reflect cultural
differences rather than real differences in satisfaction.
Table 7.6: Satisfaction with accountants’ services and advice
All UK Germany Spain Hong Kong US
Mean Mean Mean Mean Mean Mean
Satisfaction score 4.1 4.2 4.1 4.2 3.7 4.4
Scale: 1 = dissatisfied to 5 = very satisfied
Advice and the role of external accountants (continued)
PAGE 65
8.1 BANKING RELATIONSHIPS
The pattern of banking relationships and the range of
services used, together with their frequency of use,
shows marked differences between SMEs in different
countries that are not explained by other factors, such
as size. Multiple banking relationships are most
prevalent in Spain and least prevalent in the UK. The
reasons for this are partially related to the structure of
the banking industry. The UK banking industry is
dominated by four banks that provide, either directly or
through their finance subsidiaries, a comprehensive
range of services. They provide banking for
approximately 80% of all UK-based SMEs. In Spain,
Germany and the US the structure of the banking
industry is more varied, with localised banks, specialist
banks and finance providers as well as regional and
national banks. Hence SMEs in these countries have to
use more than one supplier to meet their needs and
there is competition for business between the various
banks. In both Germany and the US, changes since the
mid 1990s in the structure and practices of banking
have also led accountants to advise their SME clients to
have multiple banking relationships as a hedge against
changes in banking policy and practice.
The patterns of use of different banking services and
forms of finance also vary from country to country.
Some of these differences can be traced back to the tax
regime, as is the case in Germany where it is not tax
efficient to have surplus equity kept within the firm,
thus affecting the use of deposit accounts. The tax
regime also provides an explanation for the greater use
of loans and overdrafts. In Spain, the high use of
factoring is explained by the tax advantages and
relatively higher margins to be earned from this form of
finance than from overdrafts. On the other hand, the
relatively low use of factoring in the US and Germany
seem to be related to the cost of factoring and ‘negative
signals’ that the use of factoring engenders in the US,
and a lack of financial sophistication among SME
owners/managers in Germany.
It may also be reasonable to assume that there is an
element of substitution at work here. For example, one
could conjecture that, while in Spain factoring is used
extensively as a tool for working capital management,
in the UK and Germany an overdraft is used for this
purpose. Other factors that seem to be influential are
country-based norms, eg overdrafts and factoring are
‘frowned upon’ in the US, and there is a culture biased
towards owning rather than leasing, although this is to
some extent offset by aggressive and successful
marketing of their products by leasing companies.
It is also worth noting that the larger the SME, the
greater the range of different financial services used.
This is unsurprising and accords with previous research
in the area of SME finance. If this finding is put
alongside the finding in Chapter 7 that the smaller the
SME the less likely it is to seek advice, it does raise
questions relating to the financing of growth within
SMEs. One might conjecture that a lack of financial
sophistication may be a barrier to growth, especially
when security/collateral is a driver in bank lending
practices.
These results do not explain all the differences between
countries or different sizes of SMEs. To understand
these different patterns fully requires further research
into the nature of the banking and financial industry in
each country and the relative advantages perceived by
different SMEs, because there is clearly a cultural
dimension to what is acceptable and what is less
acceptable, eg factoring is acceptable in Spain but
frowned upon in US. It is also worth noting from the
findings that countries operate on different ‘norms’
around debt equity ratios, different banking structures
have applied and still apply, and changes in banking
structures through merger and consolidation have led
SMEs to change their banking practices. These findings
help us to get a better picture of the complexity of the
subject and also provide a clear indication that it is
unlikely that there exists a universal ‘right’ solution or
banking structure to meet SMEs’ finance needs.
8. Conclusions and areas for further research
PAGE 66
The findings show that although the banking structures
and the number of banking relationships that SMEs
have vary from country to country, there are few
differences in their satisfaction ratings of their banking
services. Once again the results suggest that despite
the clear differences in the number of banking
relationships, for example in the UK and Spain, there is
no universally ‘right’ structure or ‘optimal’ number of
banking relationships an SME should have. It would
appear from this work and other emerging work in the
area of small business finance that different banking
and financial structures and practices have evolved in
different countries, and these satisfy the needs of SMEs
within the broader context of that country.
In general, the SMEs surveyed were satisfied with their
banks, rating them at around 4 on a five-point
satisfaction scale on all eight categories. The analysis of
satisfaction by size, rather than by country, indicates
that SMEs in the size range of £250,000 to
£1,000,000 turnover are generally less satisfied than
other SMEs. This could be caused by a combination of
the increasing sophistication of their needs compared
with those of the smallest SMEs and a failure of banks
to recognise or to meet those needs. In the US the
accountants interviewed suggested that the banks do in
fact recognise the needs of this group but do not
choose to meet them.
Overall, the responses show two areas where SMES
were less satisfied and this was the case irrespective of
the country in which the SME was based. These were
‘charges or tariffs’ and the banks’ ‘level of
understanding’ of the business. Looking more
specifically at the benefits provided on current
accounts, some country-based differences are
apparent. Spanish and Hong Kong SMEs are the most
likely to receive some benefit and UK-based SMEs are
the most likely to receive no benefits. The Spanish
focus group suggested that this is because of the high
levels of competition and SMEs having multiple
banking relationships. In the US, where approximately
70% of SMEs have interest paid on their accounts or
free transactions or both, the level of satisfaction is
higher than in any other country. Here the accountants’
responses indicated that they thought the banking
industry was competitive and the charges were fair. By
contrast, in the UK, only 60% have interest paid or free
transactions, or both, and here the satisfaction rating is
considerably lower on tariffs and charges, and the
accountants were more critical of this aspect of banks’
services. The whole question of what benefits are
received and, perhaps as importantly, what they are
worth is an area for further research.
The other category where SMEs’ level of satisfaction
with their banks is lower than on the other categories is
on the banks’ level of understanding of the business.
This difference was not as great as was the case with
charges and it seems to be a general issue that is
neither size nor country related. The accountants in the
US and the UK were more damning of the level of
understanding the banks had of their small business
clients. In the US this is exacerbated by the
consolidation of the banking industry, which has led to
a loss of the ‘local knowledge’. In both the UK and the
US the separation of the lending decision from the work
of the ‘relationship banker’ and centralised or
regionalised decision making were cited as causing a
deterioration in the service provided.
The results show that, in general in all countries, SMEs
that wish to raise finance can do this successfully,
although the extent to which the bank is used varies
dramatically from country to country, with the least use
being found in the UK and the most use in Spain. Once
again the reasons for these results are not clear,
although one could conjecture that having multiple
banking relationships could have an effect on the
responses obtained.
Before leaving the subject of SMEs’ relationships with
their banks, it is worth noting that the pattern of
communication with banks is size dependent, with
Conclusions and areas for further research (continued)
PAGE 67
smaller businesses being more likely to visit their bank
and larger SMEs more likely to use other forms of
communication. Particularly striking is the fact that the
number of the largest SMEs that use electronic
communication is nearly twice as great as for the
smallest companies.
Finally, in relation to SMEs’ relationship with their
banks, it is worth noting that other measures of
satisfaction, such as the propensity to change banks,
show that SMEs are generally unlikely to change their
banks, especially where single banking relationships
are more prevalent, ie in the UK, Hong Kong and the
US. Similarly, the fact that banks are more often used
than other advisers as a source of advice, with the
exception of accountants and solicitors, would suggest
that SMEs place a high reliance and/or value upon their
relationship with their banks.
8.2 CHALLENGES FACED BY SMES
The clear message from the survey is that obtaining
new business and general finance-related issues, eg
keeping costs down, collecting debts, were the most
important issues facing SMEs. There is more emphasis
on future planning than might have been expected, since
this is not mentioned in the Warwick survey (Fraser
2004). It is not clear where the advice and help with
planning for the future comes from or if it is provided at
all. It does not, however, appear to be coming from the
firm’s external accountant, especially in the UK. Once
again this looks like an area that would warrant further
research as it may have a dramatic effect on a range of
SME-related issues such as managing growth and
succession planning, as well as perhaps informing the
direction of government support policies and practices
to develop a healthy SME sector.
Some of the issues identified are country specific, for
example Spain is experiencing the effects of
competition from low-wage economies and German
SMEs have a particular problem with slow payment,
which the accountants’ focus group attributed mainly to
poor working capital management by SME owners.
Another interesting factor to emerge from the focus
groups and interviews is a general view that public
sector bodies, as a group, are slow to pay.
No report on the issues faced by UK-based SMEs
would be complete without a mention of regulation and
red tape, which was raised unprompted by a higher
percentage of SMEs in the UK and Germany and ranks
higher than in other countries as an important business
issue, although in neither case is it the most important
issue by a long way. The UK accountants’ survey
supports the SMEs’ view that the amount of regulation
is too high, and the focus group in Germany also
confirmed that German SMEs, and indeed the country
as a whole, is highly regulated but members were more
neutral on the effects of this.
8.3 ADVICE AND THE ROLE OF EXTERNAL
ACCOUNTANTS
Given the question raised above about who offers help
and advice on planning for the future, it would be
useful to find out whether, in the view of SME owners,
there is enough advice and help available on this
important topic. The responses to the question on
issues facing SMEs, where lack of support or advice is
ranked eleventh out of the 12 issues on which SME
owners were questioned may indicate that they do not
believe that they need help on business planning. If this
is the case it would at least provide a partial
explanation for the low take up of advice. Overall, only
53% claim to use advisers, although the pattern varies
with size; 43% of the very smallest businesses use
advisers compared with 75% at the larger end of the
size range.
The results show that accountants are used by most
business as a source of advice and they are followed
closely by lawyers and banks. The results indicate that,
for larger businesses, lawyers and banks become
Conclusions and areas for further research (continued)
PAGE 68
relatively more important. This is not, in itself,
surprising as one would expect that as a business
becomes larger so its needs become more
sophisticated. Nonetheless, it does point to a strength
or weakness in the sources of financial advice as the
results indicate that banks and financial institutions
become more important as businesses grow while such
a trend for accountants, who might be seen as
independent financial advisers, is not obvious. This
may be partly explained by the accounting profession’s
rules relating to the independence of the auditor. In
Germany the use of tax advisers rather than
accountants may also account for the lack of use for
finance-related advice as the focus group indicated that
there is some question about the wider knowledge of
these specialist tax advisers.
It is also apparent that overall, as a potential source of
advice, government and public agencies are the lowest-
ranked entities that the SME respondents have used. In
the US this was explained by a combination of lack of
expertise and a lack of trust. In the UK this may not be
the case as here they are ranked fifth out of seven. In
the UK the pattern of take up of government advisers
shows that there is less use by SMEs with less than
£1,000,000 turnover.
Interestingly, in the US and Germany there was a much
greater use of business colleagues, and the accountants
saw it as merely common sense for businesses to use
other businesses that may have had similar experiences
or solved similar problems as one of the main sources
of advice. They also cited the tradition of family-owned
businesses as an explanation for this.
In general, accountants were used by a majority of
respondents for tax, audit and accounts preparation
work. It is possible that the figures for accounts
preparation are understated in the US, in particular, as
SMEs do not have to produce accounts except for tax
purposes. Although these tax accounts, which are
prepared by the external accountant, have a wide
acceptance and are frequently the accounts used when
raising finance, their primary purpose is related to tax
and as such it is possible that SME respondents may
have viewed this as tax work.
The responses on audit are out of line with what might
be expected in the US and the EU, given that there is
no requirement for audit of SMEs in the US, and in the
EU around 75% of the firms in the sample would be
exempt from audit. The results for Hong Kong do,
however, make sense as there is no audit exemption.
The US and EU results are also out of line with the
results of the accountants’ survey and discussions. The
reasons for this are not immediately apparent.
Explanations such as the requirements of banks and
public sector bodies for audited accounts may provide a
partial explanation for some cases but they are unlikely
to apply to more than a minority. Other factors
suggested that may have had some impact are the
relative lack of financial sophistication (Germany); the
complexity of the different types of service; compilation;
review; and audit (US). Nonetheless, overall this result
remains something of an anomaly.
Only a minority of SMEs used their accountants for
business planning, general advice, consultancy or
advice on access to finance. As one might expect, the
use of accountants varies with size and the legislative
regime. In the UK, the smaller the business the more
likely it is to use its accountants for accounts preparation
and the less likely it is to use them for audit. The fact
that fewer UK SMEs (36%) get financial advice from
their accountants may affect the range of financial
products they use as compared with SMEs in Spain,
where 67% use their accountants for advice on finance.
In general, the accountants’ responses indicated a
greater involvement in advising on or involvement in
raising finance than was indicated by the SMEs’
responses. This difference may arise partly from the
way in which the question is interpreted, as
interviewees took a wider view of involvement to
Conclusions and areas for further research (continued)
PAGE 69
include preparing financial data and interpreting them
for the banker. Some of the interviewees saw this role
as more of a communication and interpretation role
acting as an intermediary between the SME and the
banker. Once again it is suggested that this is an area
where further research is warranted as it was also clear
from the accountants’ questionnaire responses,
interviews and focus groups that a lack of collateral is
the main reason for finance being refused and this may
lead to a brake being put on growth. The use of
alternative sources of finance may be the way around
this for SMEs and the results on the use of different
sources of finance show that the larger SMEs are more
sophisticated in their use of finance. This group is also
most likely to seek external advice whereas fewer than
50% of businesses with turnover under £1 million or its
equivalent seek advice. The question that therefore
arises is whether a lack of knowledge and financial
sophistication together with a low propensity to seek
and use advice is a contributory factor to a lack of
growth for some SMEs.
Finally, in relation to SMEs and their advisers, the
results show that SMEs are marginally more satisfied
with the services offered by their accountants than with
those offered by their banks, although in both cases the
ratings are at the high end of the Likert scale.
8.4 OVERVIEW
Overall, while acknowledging the limitations inherent in
any research, this report provides a unique insight into
banks’ relationships with customers, as seen by SMEs
and accountants from five countries. It highlights areas
of difference in the nature of the relationships with
banks that may or not be advantageous to SMEs. These
may reflect greater choice of banking relationships in
countries with less oligopolistic banking sectors than
the UK, or it may reflect the diversity of services and
degrees of specialisation of financial institutions in the
countries surveyed. The research shows that, in
general, SMEs are satisfied with their banks and the
areas of service where the satisfaction rating is slightly
down are common across countries. Accountants were
in general more critical of banks, especially in the areas
of charges and knowledge of the clients’ business. The
results indicate that SMEs are generally satisfied with
their accountants although here the services used differ
between countries. The findings provide some
questions for accountants, SMEs and policy makers in
respect of the take up of their advice, particularly in
respect of financing the business.
8.5 AREAS FOR FUTURE RESEARCH
The areas identified for further research are issues
around substitution of services, further investigation of
why SMEs in the middle-size range are less satisfied
with the services received, and whether financial
institutions are offering an appropriate range of services
for this group of SMEs. There are also questions related
to the provision of advice for this group as well as
questions around their comparatively low take up of
advice.
Although the findings, when read in conjunction with
the background to the different banking structures,
provide some indication of the reasons why different
benefits are offered in different countries, the work
provides no information on the nature of actual benefits
received.
The reasons behind the country-based differences in
the use of banks’ services and the extent of their use as
a source of finance warrant further investigation.
The answers on business planning and its relative
importance as a business issue raises further questions
on how much this is used as a management tool by
SMEs, and who provides them with advice on this
area. The role of the accountant in the provision of
advice and, in particular, financial advice emerges as
worthy of further investigation as this may be a limiting
factor on the potential growth of some smaller SMEs.
Conclusions and areas for further research (continued)
PAGE 70
8.6 RECOMMENDATIONS
The recommendations below are offered for
consideration by the banking industry, the accounting
profession and policy makers.
The banking industry
Although in general the banking industry in each
country is providing a service that satisfies its SME
customers, there are areas that warrant further
consideration and research. These are:
• the possible gap between the aspirations of SMEs
with turnover up to £1 million and the services
provided
• the level of satisfaction with charges, tariffs and
benefits and the impact of this upon banking
relationships
• the effects of moving from localised decision making
to more centralised decision making in terms of
understanding an SME’s business and the business
environment in which it operates
• the apparent remoteness of the decision makers
from the SME and the education and training
processes used to ensure staff are competent at
what they are expected to do.
The accounting profession
The survey results show very high levels of SME
satisfaction with their accountants, but they also
highlight some areas for concern. These are:
• the relatively low use of accountants for advice on
matters relating to finances, which, as an ever-
increasing range of financial products become
available must raise the question of the sources of
advice that SMEs are currently using and the
adequacy and appropriateness of that advice
• the effects of regulatory and self-regulatory regimes
relating to audit independence on access to
accountants as a source of advice
• the question of whether they should be taking a
proactive rather than reactive role in assisting their
SME clients with finance-related advice
• the extent to which they can play a positive role in
identifying simpler structures for accounting to meet
the needs of the various users, eg to what extent the
needs of the owner, the tax authorities and financiers
can be met by one single form of reporting.
Policy makers and government
The findings show that the effects of regulation and red
tape are not universal problems and lessons can
therefore be learned from other countries. Some other
issues thrown up by this work that may be worthy of
consideration include:
• whether there are lessons to be learned from the
issues around the cost of employment and the
difficulties in recruitment being faced by SMEs in
Germany and the US
• whether to encourage more use of business
colleagues as a source of advice, as is the case in
Germany and the US, and how to achieve this
change
• how to encourage smaller SMEs to access the
advice that is clearly available to them and how to
improve the take up of government sources of advice
to SMEs.
Conclusions and areas for further research (continued)
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